May 10, 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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Is The Bottom In? Or Will This Huge Bounce Fade?
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[img]http://www.joe-duarte.com/images/pic_04.gif[/img] What's Hot Today:
U.S. stock index futures are bouncing back in a big way on Monday. Much as things started out on Friday, everything that has been down of late is bouncing back. Friday's rally died. We don't expect the same thing on Monday, but it's not altogether out of the picture either in this crazy market.
- 4-Week Bill Announcement 11:00 AM ET
- 3-Month Bill Auction 11:30 AM ET
- 6-Month Bill Auction 11:30 AM ET Consumer Credit 3:00 PM ET
Europe hits the printing presses. According to The Wall Street Journl: "The European Union agreed on an audacious 750 billion ($955 billion) bailout plan in an effort to stanch a burgeoning sovereign debt crisis that began in Greece but now threatens the stability of financial markets world-wide. The money would be available to rescue euro-zone economies that get into financial troubles. The plan would consist of 440 billion of loans from euro-zone governments, 60 billion from an EU emergency fund and 250 billion from the International Monetary Fund."
Iraq violence on the rise. According to The Washington Post: "Two car explosions and a suicide bomber have killed at least 40 people outside a textile factory, taking the day's death toll to 75, Iraq's bloodiest day of the year so far."
Transocean (NYSE: RIG) has had more problems than just Gulf oil spill, and they may have been ongoing for some time. According to The Wall Street Journal: "The sinking of the Deepwater Horizon drilling rig, which triggered the spill spewing oil into the Gulf of Mexico, caught the energy world by surprise. The operator, Transocean Ltd., is a giant in the brave new world of drilling for oil in deep waters far offshore. It had been honored by regulators for its safety record. The very day of the blast on the rig, executives were aboard celebrating its seven straight years free of serious accidents. But a Wall Street Journal examination of Transocean's record paints a more equivocal picture. Nearly three of every four incidents that triggered federal investigations into safety and other problems on deepwater drilling rigs in the Gulf of Mexico since 2008 have been on rigs operated by Transocean, according to an analysis of federal data. Transocean defended its safety record but didn't dispute the Journal's analysis."
In fact, The Journal reported: "In addition, an industry survey of oil companies that hired Transocean perceived a drop in its quality and performance, including safety by some measures, compared with its peers, though it still scored tops in one safety category." [img]http://www.joe-duarte.com/images/000.gif[/img]
[img]http://www.joe-duarte.com/images/pic_04.gif[/img] Is The Bottom In? Or Will This Huge Bounce Fade?
[img]http://www.joe-duarte.com/images/blok_rub_top.gif[/img] Europe Throws Down The Very Expensive Gauntlet But Long Term Still Looks Troubled [img]http://www.joe-duarte.com/images/blok_rub_bot.gif[/img]
Investors are in for a wild ride on Monday as the European Commission, the Eurozone, and the International Monetary Fund (IMF) have cobbled together a $1 trillion rescue package for the continent and stocks rallied massively overnight.
If you were a short seller, and you went big on Friday, you're going to get hurt today. If you've been short for a few weeks and you cover this morning, you'll probably still have some gains, but not as many as you went out with on Friday. That's the nature of the beast in a volatile market. If you get greedy, you get hurt.
So, as usual, we'll try to parse through details and figure out where this thing is going after the initial noise and hype disappears.
Europe did the only thing that they could do, agree to monetize their problems, otherwise known as printing money. Central banks will be buying bonds from the market, providing liquidity, and short covering and some buying will boost the stock market, adding a note of validity, or a tangible sign or two to the proceedings.
The EU gets a win. But there will be consequences. As this thing progresses, those who are footing the bill, the Germans, will start to make changes in their political structure. Already this weekend, Angela Merkel's FDP party took a hit in some regional elections as opposition to the Greek bailout, and Merkel's pace of deciding on how to go about deciding what to do about it backfired on the German Chancellor.
In the U.S. the Tea Party brought about its own set of political changes, both on a regional scale, and perhaps on a national scale as Utah Republican Robert Bennett was denied a chance for a fourth term in the Senate as a result of his voting record. Especially working against Mr. Bennett was his vote for the U.S. bailout after the U.S. subprime mortgage meltdown on Wall Street.
So what's really happened? Mostly, the EU is going to print money and the potential for some kind of sustained stock rally has to be entertained. Whether the money leads to some kind of economic recovery in Europe or not, though, is the big question. If the U.S. is a guide, then conditions in Europe will improve, at least some, although it could take some time to see that improvement. Then, we'll have to parse the details of the improvement, or the recovery.
What kind of job creation came of all this money? Where did the money go? What will the long lasting effects of this money be? And so on. Again, if the U.S. is any guide, it's a tough call. The U.S. job market has been trying to recover, but job growth is difficult to measure at this early stage. The Household Survey, the part of the employment report that few people talk about has been showing lots of new jobs.
So what is the household survey? It's that part of the employment report that is based on questions from 60,000 U.S. households, not the employers. So the household survey is telling us that people are perceiving themselves as being employed. That means that if the logic holds, those people in the household survey are not yet counted in the employer section of the jobs report, and that the numbers in the employer section, what Wall Street pays attention to, will swell in coming months.
What's our point? It takes a long time to figure out what's going on in the economy. The markets are rallying big this morning on expectations of something good coming from this huge package of money that will be deployed in Europe. But there is no way of knowing what this package will actually do.
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Chart Courtesy of StockCharts.com
Last week, on Thursday and Friday, the stock market got washed out, and were primed for a bounce of some sort this week. The S & P 500 (SPX) fell to levels not seen since December 2009, on the way down, and March 2010 on the way back up from the deep February lows. In fact, the S & P 500 bounced off of its 200-day moving average on Thursday and Friday of last week, and survived, albeit in a controversial bit of trading on Thursday when the infamous 1000 point drop on the Dow Jones Industrial average made the headlines.
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Chart Courtesy of StockCharts.com
Again, we look to the NYSE advance decline line (NYAD) as a symbol of the market's strength last week. Stocks clearly broke down, and looked headed for more trouble.
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Chart Courtesy of StockCharts.com
And the situation was worse on the Nasdaq, as the Nasdaq advance decline line (NAAD) also showed a broken market.
Conclusion
So what do we have? We have a huge cranking up of the printing presses in Europe, essentially joining the huge cranking up of the printing presses in the U.S. That means easy money. And that's the kind of drug that the stock market likes.
But have we really fixed anything? Not likely, at least not in the long term. Deficits are still on the rise, and will rise more based on the new bailout. And the global economy will improve, but may not include as many people as during the last up cycle.
In other words, with each successive crash, and each successive bailout/recovery, fewer people participate. The fewer the number of people participating, the more the difference is between the haves and the have nots. And governments are only likely to increase the safety net, financed by the haves.
In this scenario, no one wins in the long run. In the short term, it may be time to buy back some stocks. But it seems prudent to give Monday a chance to progress before going too crazy on the buy side.
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[img]http://www.joe-duarte.com/images/pic_05.gif[/img] Market Moves S & P 500 SPDR ETF (NYSE: SPY) Poised For Big Monday Bounce
The S & P 500 SPDR ETF (NYSE: SPY) will start the day up a whole lot from where it closed Friday.
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Chart Courtesy of StockCharts.com
The Eurozone's big bucks package to rescue its financial system will boost shares of many stocks on Monday. At least at the open. To be sure, the market will likely close higher than its Friday close, and there is a good chance that the rally, or this explosive phase could go on for some time.
But what if it doesn't? What if by Tuesday things quiet down and all we get is sideways movement for the rest of the summer?
That may not be as bad as it sounds. Volatility is the friend of the futures trader, but not of the trend following stock investor or intermediate term trader who looks to hold positions for weeks to months at a time.
This is a highly complex set of issues, and it is an increasingly complicated market, which is why being patient and paying attention to each individual position is the most important part of any trading plan.
For now, look for what SPY does below 115-117 as that's the first major trading band to deal with above this market.
