Well, we got the best of both worlds last week, lower bond and gold prices and a higher dollar, plus a bonus by getting above the 1,100 S&P level and staying there most of the week, finally closing at 1,105.98 on the S&P cash index. And add to that the cooling of the Dubai problem, at least to the degree that it is not a front page worry. It was an almost perfect week for the charts.
But, don’t think that we are out of the woods just because all the good stuff lines up end to end. The weakness that the Dubai episode uncovered nearly two weeks ago is still there. But, as of this writing, it is fair to say that it is likely no longer a game-breaker. But, what it did show to all was that the world’s central banks still have a long way to go to regain the confidence of investors.
I have said a number of times over the last two years that the worst nightmare of Mr. Bernanke, our Fed chairman, is to lose the confidence of investors. His concern over this is one of the reasons that the huge flood of “newly printed” dollars continues. At all costs, he does not want deflation to gain the upper hand. So far he has been able to keep control, which is testified to by the stock markets seven month rise.
But, last Friday’s employment report may signal the beginning of a different battle for investors. Instead of the expected near 125,000 job loss, the report showed only an 11,000 job loss and every investor in the world suddenly looked up from their computer screens and said in unison “What!?!”
The bond guys were the only ones not caught flatfooted, as I see it. They began to sell bonds last Tuesday and sold bonds heavily on Wed and Thur. When the employment number came out they just continued to sell. Bonds fell over 4 points in those three days. That is a huge drop and a clear sign that they had some sense of the coming employment numbers. I don’t mean they knew somehow from a cheat sheet. They just sensed it coming from data released during the previous three weeks. They were right.
Now, the big fear gripping the markets shifts into a whole new direction.
Remember last week when I told you that Australia had hiked their interest rates for the third month in a row? I told you that there was a drum beating in the distance. Well, the drummer is at the door now beating like there is no tomorrow. The tune is called “When?” That is, when will the Fed and other world banks begin to hike rates?
Last February the Fed said they would keep rates low for “an extended period,” as you may recall. Now investors are wondering if that period is rapidly coming to an end. Will the Fed cease entering the market and buying bonds to thrust more funds into the economy? Will Mr. Bernanke say something soon (maybe even today as he continues to face Congress during hearings that seek to give him another four year term) to indicate that rates may finally go up a bit? You can be sure that investors will be watching. And, of course, so will I.
OK, with all this as the backdrop, just where are we on the charts? Well, there is a short answer and a long answer. Let’s just stay with the short one. OK? The short answer is that the S&P continues to climb. Right after the employment numbers were announced at 8:30am Friday, there was a shot by the markets to break above the current overhead resistance (at about S&P 1,130-40). But, the attempt failed as the dollar gained a huge chunk as the day progressed, mostly from the “carriage trade” traders buying dollars to cover their borrowing activities.
Whatever the reason, the bottom line for the charts was that supports did hold up as the markets backed off sharply. Will there be another try to break up through overhead resistance. For sure. When? Don’t know at this point, but a very important event occurred last week with regard to my Keyline that makes me more confident that this next try or two will succeed. For the first time since the crash 14 months ago late in 2008, my Keyline closed at a tad higher price than the previous week. Why is this important? Because when my Keyline slope turns up, upside momentum has gained control of the chart.
Now this event is no guarantee we will just continue to climb higher, but in every BUY trade called by the Super Chart Keyline since I started to keep it 40+ years ago, that “turn-up” point was followed by at least 5-7 months of higher Keyline prices each week, with the S&P close each Friday staying above the Keyline.
Note I said Keyline prices continued higher each week. There were still ups and downs of the Friday S&P cash index prices, but even with these ups and downs the cash index stayed above the Keyline all during that time, too. My Super Chart Keyline still says that we are heading for the S&P 1,220-50 area (about 11,300-600 Dow) and, unless we close for six weeks consecutive below my Keyline, that is still where it indicates we are going. Will it be true to its 40+ year history again? No guarantee, but until it breaks my Keyline to the downside, we are going to the S&P 1,220-40 level, as I see it.
There was one other good chart development technically last week. Remember I told you of a concern I had about the Momentum Section possibly signaling a price retreat? Well, it did NOT come to pass. The green stochastic (fast) did drop to the 50 level as I felt it would, but then it moved up sharply to close last Friday at 79.01. This means, also as I had hoped, that any potential decline that might have been signaled by this formation is, for the present moment, wiped away.
However, there is one cloud on the horizon, as I alluded to above. The most significant chart development of the week was the decline in bond prices last week. The bond market, one that no one can really control because it is so huge (not even the Fed), will now be watched closely by all savvy investors. For me, I will be watching my Bond Keyline like a hawk. Currently, it sits at last Friday’s close 115.26. I have attached the current Bond chart so you can see what last week looked like.
You can see that Bonds closed at 118 26/32, down from the over 123 reading of the previous Friday. But, we are a tad over 3 points above the Keyline, still OK. But, if we were to close below my Keyline, it would signal to me that interest rates will likely be going up very soon, as the Fed anticipates a need to suck dollars out of the economy to dampen a possible inflation move. If that does occur, Mr. Bernanke will have achieved his goal of avoiding deflation for now. And it will be the first time in history that the Fed actually has changed the outcome of a possible depression. Will it work out that way? Hummmmmm. Stay tuned.
But, in the meantime, back at the ranch, stock investors will be keying on the bonds far more than the dollar for awhile. Any real potential for higher rates –- read that as pressure on earnings –- will send them scurrying for the sidelines and we might see a test of my Keyline sooner than expected. But, let us not get ahead of ourselves. I would still be a stock buyer in here, albeit it on a bit of a reduced scale for now, until we see how this current change in the winds plays out. Keep checking here each day or so. For, if the situation gets more pronounced in bond selling and higher interest rates become a real threat, I will have a special report for you as to the next steps to take. Never a dull moment!
Now, for those of you who always like to have a quick wrap-up of what news influenced the market last week, here is how I saw it:
!. Dubai moved to the backburner, still there, but not a game breaker.
2. Bonds sold off as the big players in the bond market sensed a recovering economy worldwide that might lead to higher interest rates.
3. The Friday employment report caught most investors off guard, as it indicated only an 11,000 job loss, far below the expected 125,000 job loss. And the unemployment rate dropped to 10% from 10.2%. But, be careful, one month’s number does not a trend make!
4. The metal market, especially gold, eased off its recent new high price levels, as the dollar gained ground. And the dollar gained ground as “carriage trade” traders –- those who borrow dollars at almost 0% and invest for higher interest rates elsewhere in the world –- began to cover their borrowing by buying dollars to repay their borrowing.
5. Several of the big U.S. banks announced they will be paying back their government loans –- oops, their Fed loans; remember the Fed is NOT a government entity –- with the Bank of America the biggest one making such an announcement.
6. Not much in the way of political developments to move the market last week, but keep your eye on the troop surge progress and the Congress battling over the health care issue.
Of course, there were other events, but all were of much less importance than these six, as I see it. Hope that helps you put the market’s reactions into perspective.
Well, that’s about all this week. The bottom line remains that the S&P is still above its Keyline by over 40 S&P points, bonds remain above their Keyline by over 3 points, gold is way above the Keyline, oil has been above its Keyline since early October (not such a good sign) and the dollar continues well BELOW its Keyline. Best scenario this week would be bonds steady, dollar steady to a little higher, gold soft, and the S&P staying above its 1,100 level. Worst scenario would be bonds dropping fast, dollar rising fast, and the S&P dropping below its 1,080 level.
Well, as always, do have a good investing week. And you keep in touch. I do! See you next week.
Closes as of Friday 11-27-09 CHANGE (cash index prices)
DOW Indu. 10,388.90 +79 points
S&P 1,105.98 +15 points
NASDAQ 2,194.35 +56 points
30 YR BONDS 118 12/32 -4 12/32 (big drop here!)
GOLD 1,169.50 -$10
OIL 75.81 -$.15
TOP 10 STOCK SECTORS LAST 6 MONTHS @12-6-09
1. BROADCAST (++67%) #2 LAST WEEK
2. PRINTING (+48.7%) SAME AS LAST WEEK
3. AUTO (+45.4% #4 LAST WEEK
4. ENGINES (41.3%) #1 LAST WEEK
5. PUBLISHING (40.8) SAME AS LAST WEEK
6. ELECTRICAL (+40.3%) SAME AS LAST WEEK
7. TOOLS (+37.7%) #9 LAST WEEK
8. CONSUMER PRODUCTS (+37.1%) NEW TO LIST THIS WEEK
9. MINING (+31.8%) #10 LAST WEEK
10. TEXTILE (+30.4%) #8 LAST WEEK
*The name Super Chart Keyline is a registered Trademark of Max Whitmore.
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