May 5, 2010, 08:00 EST [img]http://www.joe-duarte.com/images/line_main_top_03.gif[/img] Dr. Joe Duarte's Market I.Q. [img]http://www.joe-duarte.com/images/line_main_top_05.gif[/img] [img]http://www.joe-duarte.com/images/line_main_top_07.gif[/img] [img]http://www.joe-duarte.com/images/000.gif[/img]
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Attention Shifts To Employment Report
[img]http://www.joe-duarte.com/images/000.gif[/img][img]http://www.joe-duarte.com/images/000.gif[/img] [img]http://www.joe-duarte.com/images/pic_04.gif[/img] What's Hot Today: U.S. stock index futures were pointing to a lower opening on Wednesday. There was some technical damage done to the market on Tuesday. This market could unravel.
- Bank Reserve Settlement
- MBA Purchase Applications 7:00 AM ET
- Challenger Job-Cut Report 7:30 AM ET
- ADP Employment Report 8:15 AM ET
- Treasury Refunding Announcement 9:00 AM ET
- 3-Yr Note Announcement 9:00 AM ET
- 10-Yr Note Announcement 9:00 AM ET
- 30-Yr Bond Announcement 9:00 AM ET
- ISM Non-Mfg Index 10:00 AM ET
- EIA Petroleum Status Report 10:30 AM ET
New York: State governmetn on verge of shutdown. According to The New York Times: "Gov. David A. Paterson said he would include work furloughs in an emergency spending bill that is needed to prevent a government shutdown."
North Korea: Troop increases at border with South. According to Stratfor.com: "North Korea recently deployed about 50,000 special forces along its border with South Korea, according to a high-level source, Yonhap reported May 5. Pyongyang recently completed the frontline deployment of seven light infantry divisions, which is something it had pushed for in the past two to three years, the source said, adding that each division consists of about 7,000 troops."
Greece: Bailout is "flop" says Journal editorial. According to The Wall Street Journal editorial: "According to the latest official projections, Greek public debt, currently 108% of gross domestic product, will top 149% of GDP in 2013, the year that the bailout loans, in theory, come due. Assuming an average interest rate of 6% on that debt, Greece would be left paying 9% of its GDP to bondholders, 80% of whom are located abroad. Put another way, 25% of Greek tax revenue would go toward interest payments to foreign bondholders. Meanwhile, Greece's government spending equals more than 50% of GDP and labor productivity is well below the EU average, neither of which bode well for growth going forward.
The EU and IMF insistence that no haircuts and no restructuring are in the cards isn't credible, as yesterday's market turmoil testifies. There is now a real possibility that national parliaments in Germany, Slovakia and other EU states won't approve some of the promised funds. The contentiousness of funding Greece's bailout makes any further bailouts, whether for Portugal or for Greece in a second round, look remote. Far from silencing market speculation about Greece's fate, the bailout has turned up the volume."
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[img]http://www.joe-duarte.com/images/pic_04.gif[/img] Attention Shifts To Employment Report
[img]http://www.joe-duarte.com/images/blok_rub_top.gif[/img] Nervous Markets Should Consider What The Wall Street Black Boxes May Be Holding These Days [img]http://www.joe-duarte.com/images/blok_rub_bot.gif[/img]
As the situation in Greece takes a break of sorts, at least within the financial markets, traders are turning their attention to the next big number, Friday's emmployment report. And while the number may be positive, it's no guarantee that the market will rally in response. If that's the way it works out on Friday, things may be worse than anyone had expected.
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Chart Courtesy of StockCharts.com
It's always a tough task to handicap the employment report. But this time around, it's bound to have some positive numbers. After all, many indicators suggest that some people are going back to work and that the U.S. economy has started on an albeit timid upward path of late.
Last month showed 162,000 jobs were created. And estimates for this month range from 110 to 500,000 new jobs having been created, with 200,000 being the average number of expected jobs being thrown around. And while the numbers released on Friday may be positive, in some light, the markets are a lot less bullish looking than they have been for some time.
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Chart Courtesy of StockCharts.com
The traditional leadership sectors, the financials (BKX) and technology (MSH) are both in short term down trends. And small stocks (RUT), which had been leading the market higher for the last few months have also taken a hit lately.
This suggests that the sellers are now more firmly in control of the market, and that any positive response to the employment report may be limited.
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Chart Courtesy of StockCharts.com
And our most trusty indicator of late, the NYSE advance decline line (NYAD) seems to have made a triple top and may have broken down, as illustrated by the break below recent support on 5-3, as the markets took a big tumble.
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Chart Courtesy of StockCharts.com
And while the Wall Street media machine continues to spout the recovery mantra on CNBC and elsewhere, we are seeing some negative developments, both in the market, as we highlight above, as well as in the streets.
This week, we've spent a fair amount of time reporting on the less than rosy picture we've noted at casual dining restaurants, where waiters are having dinner as they wait for customers to show up. We've noted the large numbers of "For Sale" signs in well to do neighborhoods, and the empty lots and empty new houses in subdivisions in previously booming areas of the Dallas Forth Worth Metroplex.
And we've also noted that government and private industry figures suggest that consumers spent much more than they had in the last few months, a fact that has likely contributed to the "evidence" that supports a "recovery." Perhaps, the most worrisome development is the record number of "REO" homes, those that have been foreclosed and have not been sold, but are now sitting on bank and investor balance sheets.
To us, it seems that the market, barring some kind of a miraculous recovery, is now starting to add up the same factors that we've noted here, which is why stocks are starting to roll over.
Conclusion
The case for a top in the stock market is building. The question is whether this is a 5-10% correction, if that much, or whether something else, such as a full fledged bear market lies ahead.
There are plenty of potential reasons for a bear market, but markets are irrational and essentially are predictably unpredictable.
What we've learned with this cycle is that Goldman Sachs, Morgan Stanley, Bank of American, JP Morgan, Deutschebank, UBS, and the rest of the "banks" have had weird derivatives and opaque trades on their books for years. Hedge funds, often take the other side of this trade. And what we now know, is that those trades, and their repercussions are the real market movers, instead of the daily grind of economic data and market response.
What we're saying is that whatever is inside the black boxes and dark pools of the big money center banks and their hedge fund counterparts will likely influence what goes on in the rest of the markets.
Now, consider this. No one, sometimes not even the CEOs of these big institutions, what some of the trading desks are doing. They didn't know what was going on in subprime, so why should we think it's any different now.
So, if there is no way to know how many of those "derivatives" and credit default swaps are still on the books of the big banks, or on what the bets are on, then the potential for another wave of "unexplainable" selling is possible under the right set of circumstances. We don't even know if there are still unresolved bets from the subprime mortgage meltdown left on anyone's books. We don't even know if the Federal Reserve took on any of those bets when it bought "toxic" assets from those banks during the TARP bailout.
What we're saying is that no one really knows what's happening inside the really big money circles at this point in time. And now, there is no way to know how much government money may or may not be involved in these esoteric bets. Things were going along swimmingly, and now they're not. We don't know why other than noting what is obvious, such as the empty houses and the empty restaurants. And that worries us. We think the charts are sending a cautionary message and that investors should pay attention.
Dr. Duarte is currently short the financial sector via the SEF ETF. This is an example of a hedge. Visit all our different sections as Dr. Duarte's positions are highlighted. Prepare for an uncertain future. Get a detailed trading plan in your pocket. Read Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for All Seasons. Also Available As Kindle Books.
[img]http://www.joe-duarte.com/images/pic_05.gif[/img] Market Moves Ultrashort Health Care ETF (NYSE: RXD) Seems To Have Bottomed
The Ultrashort Health Care ETF (NYSE: RXD) has joined the ranks of bearish trend ETFs that are starting to perk up.
[img]http://www.joe-duarte.com/images/rxd.png[/img]
Chart Courtesy of StockCharts.com
The initial response in the health care sector to the "reform" law passed earlier this year was mostly positive. This was especially noticeable in the HMO sector.
But lately, it's those HMO stocks that are starting to look increasingly weak. In fact the Morgan Stanley Health Payors Index (HMO) broke below key suport on Tuesday, even as other areas of health care fell a lot less in a tough market.
It seems to us that the weakness in the HMOs is the most likely reason, at least in the short term, for the strenght in RXD, which has crossed above its 20-day moving average and looks headed for a test of the 50-day line.
The only thing missing in RXD's rally is volume, which is why the ETF is a bit more volatile than some other bear funds with better investor participation.
What's the bottom line? Watch the HMO stocks and see how their fortunes correlate with RXD's price.
