This past week the markets jumped at the start and then traded sideways...
DRIVING OUR UNITED STATES OIL FUN (USO) CALLS TO A SWEET FIVE-DAY THIRTEEN PERCENT OPEN GAIN!
The good news is the USO is still looking bullish and will likely exceed our profit target this week for an even greater profit. Meanwhile our other two open plays are mostly treading water waiting for the markets next bout of volatility to drive them past their profit points.
Where that volatility will come from and which way is this market will move this week is the big question right now. To help find out and to zero in on where our profits are this week let's take a good look at...
WHICH WAY THIS MARKET IS HEADED
The charts show the markets bouncing hard off of oversold levels from two weeks ago--the SP-500 jumped 2.37% last week scoring its second-straight weekly gain and best two-week percentage performance since November. The energy, financial and materials sectors led Friday's gains, while the health-care sector led to the downside.
The Nasdaq rose a slight 0.11% Friday to 2309.80--its seventh-straight positive close and marking the measure's longest winning streak since a 12-day run last July. The Nasdaq is up 2.95% on the week with almost all the gains coming last Tuesday.
So what happened this past Tuesday to launch the markets above their 200 day moving averages and into positive territory? In a word it’s the Euro. After the break under 119 the euro found traction in the form of numerous upgrades for European economic estimates and a couple of successful debt sales. The U.S. market rally owes its strength to the sudden rise in the euro and the corresponding decline in the dollar.
Analysts said most of the Euro rally was fueled by short covering, but the fact that Spain was able to unload $3.7 billion in 10-year bonds on Thursday didn't hurt. Demand was almost twice the amount on offer--an impressive showing. The country was also able to successfully sell almost $592 million in 30-year bonds.
The Euro rose 2.3% to $1.2388 against the greenback as traders unwound bearish bets. Hedge funds and other speculators reduced short positions in the EUR/USD pair trade to 62,360 contracts on June 15 compared to 111,945 just a week earlier – an eye-popping 44% drop.
The improved outlook for global growth even overcame bad news from the NAHB Housing Market Index. The index fell to 17 for June compared to the revised May level of 22--a sobering 22.7% drop--four times higher than expected. The decline was directly related to the end of the housing tax credit qualification period on April 30th and begs the question of how strong the US economy would be without constant stimulus to pump up the numbers.
The cycle high for this NAHM Housing Index was 72 versus this most recent reading of 17--an incredible drop and one that will take years to retrace. This is an extremely bearish level for housing and can also be seen in the mortgage applications index which has sunk to 167 from well over 500 during the boom. New home sales are going to continue to decline until the economy recovers and home buyers work through the 5-7 million foreclosures now on the market.
The overall economy is still weak but there are bright spots--the Semiconductor Index rallied more than 5% to a six-week high on comments from Best Buy and an improved global demand outlook. Best Buy said PC sales and especially laptops, netbooks and other mobile devices were selling strongly. Smart phones were also in high demand. This implied blessing of all things chip related along with a bullish report out of Taiwan helped power the SOX toward the top of its two month range.
Taiwan Semiconductor--the world's largest contract chipmaker--predicted chip sales would rise +7% annually from 2011 through 2016. Strong demand from China plus the new wave of electronic devices like the iPad were cited as the main drivers. Plus there is a wave of new devices coming in the near future as the age of portable electronics hits its stride. Chipmaker United Microelectronics (UMC) said that chip demand would exceed supply in the third quarter and they have seen no impact to demand from the Eurozone problems.
Apple reported sales of the new iPhone 4 are so strong that the company suffered a systems failure and could not process orders on Tuesday. The new phone does not officially go on sale until June 24th but Apple started taking reservations this past week with all the iPhones available sold out on the first day--another indication of the strength of the mobile electronics market.
In addition to increasing chip and electronics sales major credit card issuers reported improved results in May. The rate of payments that were 30 days or more past due declined for all six of the biggest card companies. Citigroup said delinquencies fell to 8.42% from 9.02% in April. All the other issuers said the declines were similar except for American Express whose delinquencies fell to 3.1% from 3.3%. AXP typically has fewer problems because of their higher credit standards. It looks like the worst credit risks have been charged off over the last two years and those that are left are paying their bills.
One of the best gauges of market sentiment is how traders react to news and even here we have a bullish indicator. This past week initial jobless claims rose 12,000 to 470,000 and the 4-week moving average is climbing. There is a case to be made that unemployment will rise through the end of the year and the fact that the market was able to rise in the face of that news is a bullish sign.
It will be interesting to see if that bullishness can be maintained as the economic data released over the next few days expected to be weak. We've got two reports on housing and one on durable goods. However even if the data does come in soft it could be offset somewhat by the Fed's FOMC meeting on Wednesday. The FOMC is expected to maintain its exceptionally low interest-rate policy amid persistently high unemployment and almost non-existent inflation.
We won't get the real flood of earnings until July but this coming week will provide some insights as to what to expect. We've got five S&P 500 companies reporting results on Tuesday, including Adobe Systems, Jabil Circuit, Red Hat in the tech sector and Carnival Cruise lines and drug store chain Walgreen.
On Wednesday, home-improvement retailer Bed Bath & Beyond reports quarterly results, along with Nike and payroll company Paychex Inc.
Business software giant Oracle and home builder Lennar report on Thursday. Credit card company Discover Financial Services and tax preparer H&R Block Inc. also report on Thursday. Those companies are diverse enough to provide a good read on how earnings are likely to play out this quarter.
Last quarter year-over-year comps were pretty easy to beat but that is going to get tougher as we move forward--traders are going to want to see some real growth and not just more cost cutting. Forward guidance will also be critical and what we've seen so far has been pretty cautious.
So we've got a rebounding market, persistently high unemployment, a slowing housing sector, bullish investor sentiment and several earnings reports this coming week--the question is...
HOW DO WE MAKE MONEY ON IT?
In a market like this one that has made a big move higher but is now trading sideways the key is to pick individual stocks that hold immediate potential to out-perform the larger indices--and that's exactly what we've got this week.
What is interesting is that in spite of the markets generally good performance this past week there seem to be very few charts with really compelling bullish set-ups. Many stocks have risen--but most of them simply jumped to their larger downtrend lines and stalled--not exactly confidence inspiring.
What we do have however are two charts with extremely compelling bearish set-ups. The first is a specially drug company that has just traced a classic bearish uptrending pennant--then broke below the bottom trendline Friday for what looks to be a super set-up using some very inexpensive options--with some very big profit potential.
Our next play is on a retail conglomerate that is having trouble getting out of its own way--and the chart shows it. The stock rose slightly with the rest of the market early last week and then tumbled lower on Friday--a day when the rest of the market was moving higher. This is a very bearish sign and one we'll be taking advantage of with the right puts first thing Monday morning.
We've got a market stalling sideways with two plays ready to make us money on the downside--so let's get to it...
For more information on everything you receive with your Pearly Gates subscription click on www.cashflowheaven.com/pg
Monday, June 21, 2010
Monday, June 7, 2010
An Annualized Rate of Return of 101% with an over 92% Probability of Success...
Greetings Fellow Secreteer,
Earlier this week, one of the nation’s chief economists compared what we’re seeing in the financial markets to a roller-coaster ride of many sleepless nights and a decade of no returns. He pointed out that this has been the worst market cycle since 1937, followed by the best one since 1932, followed by the worst May since 1940. As an investor, he recommended a classic long-term outlook using short strategies to protect oneself against big drop-outs in the market. Bear markets, he said, typically run in three cycles: a sharp downturn, a rebound and then a drawn-out fundamental downtrend.
That outlook should have most traditional investors curling up in the fetal position under their beds longing for their long-lost teddy bears.
According to this leading economist, we’re already beginning this third cycle--BUT he also went on to say that this was a perfect environment for “income-oriented” investment strategies (sometimes I feel like Pavlov's dog--the word 'income' invokes instant attentiveness). If this guy is right we’re in the perfect environment to be an options trader--our particular kind of options trader. With no other choice but to trade the upside, 401Ks and other mutual funds will certainly struggle. Long-term investors will most likely tread water like they have for the past ten years. But as spread traders, we have a REAL shot at creating an ever-increasing monthly income through what I am convinced will increasing prove to be the winning secret.
Trader’s Tip:
Historically,
The “Summer Rally” is generally the weakest of all four seasons.
For the week after June expiration, the Dow has been down 17 out of the last 19 years.
June ends NASDAQ’s best eight months of the year.
Tuesday, June 1st and Wednesday June 2nd are bullish trading days.
Key Dates:
June 17th--options expiration for some indices.
June 18th--options expiration for all equity and all other index options.
July 15th--options expiration for some indices.
July 16th--options expiration for all equity and all other index options.
Market Outlook:
Last Friday’s job’s report was a big disappointment for Wall Street which ultimately sent stocks tumbling causing the Dow to break the 10K psychological barrier and ending down 323 points or -3.15% on the day. The drop created the lowest close since February and the 3rd worst for the past year. It appears that all of last month’s job market gains were largely due to government hiring and unfortunately not the private sector. For the month of May, just 41,000 employees were hired as compared to 218,000 for the previous month. In a bit of a twist, the government said 431,000 jobs were created last month but the majority of them (411,000) came from temporary hiring of census workers. Even this number fell short of expectations because the projection was for 513,000 new jobs.
Adding to the sell-off was the news of yet another European country announcing financial fraud and a 'situation far worse that anticipated'. A spokesman for Hungary’s prime minister stated that its economy is in a grave situation and it hopes to avoid a crisis and bailout similar to that of Greece. Interesting enough, Hungary is not a member of the European Union and does not use the euro currency. For this reason the EU will not necessarily jump to save Hungary and there is a very real possibility that the country may soon be in default. Spain and Portugal also continue to struggle as the euro has fallen by more than 10% since stocks topped out about six weeks ago. Regardless of what happens, continued weakness throughout Europe will make it a lot more difficult for the U.S. economy to recover--for two reasons--1) our major corporations sell into the European market and as the consumer over there becomes more strapped demand will fall--and 2) European debt adds to our debt because we are the largest funder of the IMF.
Meanwhile back here at home regulators shut down another five banks in Nebraska (1), Mississippi (2), and Illinois (2). That’s 81 bank failures so far since January and the FDIC expects that the final cost in resolving all bank failures to be somewhere in the neighborhood to the tune of $100 billion over the next four years.
According to another leading economist, the global debt issues that we’re facing will most likely last another 6-8 years. And during that time low market returns and wild stock market swings will be the norm so whatever your trading style this 'new reality' needs to be considered. Fortunately we use a strategy that--win, lose or draw--we are out of in eight weeks or less.
What are the Secrets of the Week?
Fundamentally, as one could probably guess, the trend line for U.S. equity prices will be down with sessions of intense volatility. To compensate for this, we’ll continue to play bearish spreads whenever the ROI is sufficient and also incorporate neutral plays with the highest probability wins. For this week, there’ll be two plays--both of which take advantage of the market’s soured sentiment, increased implied volatility and as such, higher probability of win---so let’s get to it...
You can get in on these trades along with two new high-probability trades per week by clicking here now. www.thewinningsecret.com
Stack the Deck on Every Trade,
Robert
To all our subscribers, God Bless and have an awesome trading week!
Your comments, questions and feedback are always welcome: customerservice@cashflowheaven.com
PO Box 554, Ashland, OR 97520 www.cashflowheaven.com/ws 877-507-7878
Earlier this week, one of the nation’s chief economists compared what we’re seeing in the financial markets to a roller-coaster ride of many sleepless nights and a decade of no returns. He pointed out that this has been the worst market cycle since 1937, followed by the best one since 1932, followed by the worst May since 1940. As an investor, he recommended a classic long-term outlook using short strategies to protect oneself against big drop-outs in the market. Bear markets, he said, typically run in three cycles: a sharp downturn, a rebound and then a drawn-out fundamental downtrend.
That outlook should have most traditional investors curling up in the fetal position under their beds longing for their long-lost teddy bears.
According to this leading economist, we’re already beginning this third cycle--BUT he also went on to say that this was a perfect environment for “income-oriented” investment strategies (sometimes I feel like Pavlov's dog--the word 'income' invokes instant attentiveness). If this guy is right we’re in the perfect environment to be an options trader--our particular kind of options trader. With no other choice but to trade the upside, 401Ks and other mutual funds will certainly struggle. Long-term investors will most likely tread water like they have for the past ten years. But as spread traders, we have a REAL shot at creating an ever-increasing monthly income through what I am convinced will increasing prove to be the winning secret.
Trader’s Tip:
Historically,
The “Summer Rally” is generally the weakest of all four seasons.
For the week after June expiration, the Dow has been down 17 out of the last 19 years.
June ends NASDAQ’s best eight months of the year.
Tuesday, June 1st and Wednesday June 2nd are bullish trading days.
Key Dates:
June 17th--options expiration for some indices.
June 18th--options expiration for all equity and all other index options.
July 15th--options expiration for some indices.
July 16th--options expiration for all equity and all other index options.
Market Outlook:
Last Friday’s job’s report was a big disappointment for Wall Street which ultimately sent stocks tumbling causing the Dow to break the 10K psychological barrier and ending down 323 points or -3.15% on the day. The drop created the lowest close since February and the 3rd worst for the past year. It appears that all of last month’s job market gains were largely due to government hiring and unfortunately not the private sector. For the month of May, just 41,000 employees were hired as compared to 218,000 for the previous month. In a bit of a twist, the government said 431,000 jobs were created last month but the majority of them (411,000) came from temporary hiring of census workers. Even this number fell short of expectations because the projection was for 513,000 new jobs.
Adding to the sell-off was the news of yet another European country announcing financial fraud and a 'situation far worse that anticipated'. A spokesman for Hungary’s prime minister stated that its economy is in a grave situation and it hopes to avoid a crisis and bailout similar to that of Greece. Interesting enough, Hungary is not a member of the European Union and does not use the euro currency. For this reason the EU will not necessarily jump to save Hungary and there is a very real possibility that the country may soon be in default. Spain and Portugal also continue to struggle as the euro has fallen by more than 10% since stocks topped out about six weeks ago. Regardless of what happens, continued weakness throughout Europe will make it a lot more difficult for the U.S. economy to recover--for two reasons--1) our major corporations sell into the European market and as the consumer over there becomes more strapped demand will fall--and 2) European debt adds to our debt because we are the largest funder of the IMF.
Meanwhile back here at home regulators shut down another five banks in Nebraska (1), Mississippi (2), and Illinois (2). That’s 81 bank failures so far since January and the FDIC expects that the final cost in resolving all bank failures to be somewhere in the neighborhood to the tune of $100 billion over the next four years.
According to another leading economist, the global debt issues that we’re facing will most likely last another 6-8 years. And during that time low market returns and wild stock market swings will be the norm so whatever your trading style this 'new reality' needs to be considered. Fortunately we use a strategy that--win, lose or draw--we are out of in eight weeks or less.
What are the Secrets of the Week?
Fundamentally, as one could probably guess, the trend line for U.S. equity prices will be down with sessions of intense volatility. To compensate for this, we’ll continue to play bearish spreads whenever the ROI is sufficient and also incorporate neutral plays with the highest probability wins. For this week, there’ll be two plays--both of which take advantage of the market’s soured sentiment, increased implied volatility and as such, higher probability of win---so let’s get to it...
You can get in on these trades along with two new high-probability trades per week by clicking here now. www.thewinningsecret.com
Stack the Deck on Every Trade,
Robert
To all our subscribers, God Bless and have an awesome trading week!
Your comments, questions and feedback are always welcome: customerservice@cashflowheaven.com
PO Box 554, Ashland, OR 97520 www.cashflowheaven.com/ws 877-507-7878
OUR NEW BEARISH PLAY ON THE PROSHARES ULTRA SHORT SP-500 (SDS) IS ALREADY UP TWENTY PERCENT AND COUNTING!
Greetings Bear Rakers, Downside Raiders and Money Makers,
This past week the markets were recovering but ultimately ended to the downside adding some nice open profits to our new bearish positions...
OUR NEW BEARISH PLAY ON THE PROSHARES ULTRA SHORT SP-500 (SDS) IS ALREADY UP TWENTY PERCENT AND COUNTING!
AND OUR OTHER NEW BEARISH POSITION ON THE DIREXION FINANCIAL 3X BEAR (FAZ) IS ALREADY UP A SWEET THIRTY-SIX PERCENT!
Since these are our only open plays right now we're all in profit territory and it looks like the gains on these two play are just getting started based on Friday's very bearish close. Any more downside in the SP-500 or the financial sector and the profits on these two will launch through the roof!
So that's all good news--but what can we add this week to really benefit our portfolios? To help answer that question let's take a good look at...
WHICH WAY THIS MARKET IS HEADED
The SP-500 ended at a new three month closing low just below 1065--you have to go all the way back to early February to find a lower low and before that to November. Friday's close is right at support and it's not surprising we got there considering all the global risk right now--the question traders have to asking themselves is--will support hold this coming week?
Unfortunately resistance at the 200-day was tested multiple times last week and failed every time. Support at 1065 has also held so far--but we've got downside momentum building and increasingly nervous traders so we could easily see a break-down this week.
The Nasdaq was holding above the 200-day until its -83 point drop on Friday. The tech index is still slightly more bullish than the Dow/SPX but only barely. If the SPX falls below Friday's close the Nasdaq will follow--once Apple makes their big new iPhone announcement on Monday all bets are off. Look for a spike higher on AAPL after Job's announcement--immediately followed by a crash in a classic 'sell the news' event.
All thirty stocks on the Dow closed down on Friday marking the lowest finish since February 8th. This close at the lows is also a huge warning sign that we are about to test another level of support, possibly in the 9500 range. The Dow failed multiple times to break back above the 200-day average just like the SP-500.
Friday's plunge came on nearly 11 billion shares of volume after the lowest volume week since early April. We averaged right at 9 billion shares all week until Friday's crash. Here's the tell-tale sign of a bear market--lower volume on the advances and higher volume on the declines. We saw multiple failures at high profile resistance, slowing volume as those resistance levels were hit and spiking volume as stocks broke down.
The big selling catalyst for Friday was the Non-Farms Payroll Report for May. Jobs are critical for a lasting economic recovery and investors carried a lot of hope into this report--estimates were being revised higher right up until the release. Goldman Sachs revised their estimates to 600,000 late in the week and President Obama was bragging in a televised speech about the strong jobs growth expected for May.
Unfortunately out of the 431,000 new jobs reported only 41,000 jobs came from the private sector--all the rest were temporary census works due to be laid off by summer's end.
When estimates for hiring in the private sector ran from 50,000 to 200,000 jobs that's a big whopping miss. Nobody expected less than 50K and almost everyone expected more than 100K. After adding 231,000 private jobs in April and 208,000 in March, 41,000 is a disaster. No wonder the markets sold off.
On top of a really bad total number the average duration of unemployment increased to 34.4 weeks---a new record. Plus a record 46% of unemployed workers have been out of work for more than six months. The number of newly unemployed workers (less than five weeks) increased by 2.75 million to 18.7% of all unemployed workers.
The U6 unemployment rate--which includes those working part time for financial reasons while looking for a new full time job--is now 16.6%. That is the real unemployment number not the often quoted official rate of 9.7%.
If the jobs numbers were not enough to scare investors out the door the new Hungarian government---sworn in less than a week ago---announced they are going to implement a new austerity plan to tackle the countries surprisingly bleak economic situation. The new administration warned it inherited a much worse financial situation than their predecessors had indicated and had found that the economic numbers had been falsified. Ouch--once investors know the books have been cooked it is really hard for a country (or company) to borrow any more money making further financing very difficult.
The new prime minister's spokesman said, "Hungary has only a slim chance of avoiding a Greek-style debt crisis although the administration would act quickly to avoid the Greek path." The Hungarian currency plunged over 2% against the euro and hit a new one-year low. The stock of the country's largest bank fell 11.1%.
The new center-right government won the April elections by a landslide capturing a two-thirds majority and ousting the incumbent socialists. The campaign platform was to boost growth via tax cuts and various economic stimulus measures. This was contrary to the new socialist wealth redistribution programs and tax hikes proposed by the incumbents.
Hungary borrowed money from the IMF and EU in 2008 to avoid a default. As a condition of the loan Hungary was supposed to freeze its deficit at 3.8% of GDP. The new administration claims the corrected numbers show the 2010 deficit to be 4.5% to 4.8% but some analysts are pegging it at more than 5%.
The sudden arrival of Hungary as another potential economic implosion is not such a big deal by itself--but it adds one more warning that unsustainable debt levels are endemic to Europe as a whole. Investors are now rightly wondering when the whole house of cards will fall--we heard about Greece in April, Spain in May and Hungary in June. The list of 'emergency countries' is growing and at some point soon it will be more than France and Germany can handle.
Now EU banks are refusing to lend to each other because of the potential balance sheet problems of owning too much sovereign debt. On Friday the European Central Bank or ECB reported overnight deposits from member banks reached a record 320.4 billion Euros--by far the most since the euro was created in 1999. Those deposits earn 0.25% so the ONLY reason member banks would park cash there is because they are extremely worried about a complete melt-down with massive losses. The ECB warned member banks will have to write off more loans this year than in 2009--the banking crisis is back--it's in the EU--and it's escalating.
A strong rumor surfaced Friday that Societe Generale--the international banking giant head-quartered in Paris--is facing huge derivatives losses. The euro plunged -1.6% on the news although the rumor was quickly denied by "unofficial" sources at SocGen. The company's stock fell -7.6% despite a soothing statement by the company. When asked by CNBC about the rumor a SocGen spokesman said, "If we had something to say, would have already communicated." Sounds like what the banks were saying right before our melt-down back in '08.
The economic calendar for this week is pretty light with the only material event the Fed Beige Book on Wednesday. There was a call by Kansas City Fed President Thomas Hoenig to raise the interest rate to 1% by the end of the summer so the Beige Book will be a key indicator for the June 22nd FOMC meeting.
Dallas Fed President Richard Fisher, St Louis Fed James Bullard and Philly Fed's Charles Plosser have also expressed reservations about the 'extended period' language. Jeffrey Lacker said he was "marginally comfortable" with the phrase and Atlanta Fed President Dennis Lockhart said he backed language promising rates near zero. "Waiting too long is probably less risky than moving too soon." We will hear a lot more of this kind of positioning before the June FOMC and it too will spook investors. Any threat of higher rates in this tenuous environment could be the last nail in this market's coffin.
Considering the events of the past week it is a wonder that we didn't close a lot lower. We had the Gaza peace armada and the blow up over IDF soldiers killing nine people. And in a chilling warning North Korea stated that war could erupt soon. "The present situation of the Korean peninsula is so grave that a war may break out at any moment" according to Ri Jang Gon, deputy ambassador. Plus we had an alarmingly dismal employment report and more bad news out of Europe--the question is...
HOW DO WE MAKE MONEY ON IT?
We've got two new super-high potential trades lined up this week and as you may have guessed--they are both bearish.
The other thing they have in common is they are both on indices or exchange traded funds--one of them goes down if the market goes down and one of them goes up if the market goes down--we'll position ourselves accordingly to profit on any further market weakness.
The bottom line is both of these positions are poised to make us money--a LOT of money--and we'll be jumping in first thing Monday!
We've got a market ready to move and two plays to profit from it--so let's get started...
For more information on everything you receive with your Pearly Gates subscription click on www.cashflowheaven.com/pg
This past week the markets were recovering but ultimately ended to the downside adding some nice open profits to our new bearish positions...
OUR NEW BEARISH PLAY ON THE PROSHARES ULTRA SHORT SP-500 (SDS) IS ALREADY UP TWENTY PERCENT AND COUNTING!
AND OUR OTHER NEW BEARISH POSITION ON THE DIREXION FINANCIAL 3X BEAR (FAZ) IS ALREADY UP A SWEET THIRTY-SIX PERCENT!
Since these are our only open plays right now we're all in profit territory and it looks like the gains on these two play are just getting started based on Friday's very bearish close. Any more downside in the SP-500 or the financial sector and the profits on these two will launch through the roof!
So that's all good news--but what can we add this week to really benefit our portfolios? To help answer that question let's take a good look at...
WHICH WAY THIS MARKET IS HEADED
The SP-500 ended at a new three month closing low just below 1065--you have to go all the way back to early February to find a lower low and before that to November. Friday's close is right at support and it's not surprising we got there considering all the global risk right now--the question traders have to asking themselves is--will support hold this coming week?
Unfortunately resistance at the 200-day was tested multiple times last week and failed every time. Support at 1065 has also held so far--but we've got downside momentum building and increasingly nervous traders so we could easily see a break-down this week.
The Nasdaq was holding above the 200-day until its -83 point drop on Friday. The tech index is still slightly more bullish than the Dow/SPX but only barely. If the SPX falls below Friday's close the Nasdaq will follow--once Apple makes their big new iPhone announcement on Monday all bets are off. Look for a spike higher on AAPL after Job's announcement--immediately followed by a crash in a classic 'sell the news' event.
All thirty stocks on the Dow closed down on Friday marking the lowest finish since February 8th. This close at the lows is also a huge warning sign that we are about to test another level of support, possibly in the 9500 range. The Dow failed multiple times to break back above the 200-day average just like the SP-500.
Friday's plunge came on nearly 11 billion shares of volume after the lowest volume week since early April. We averaged right at 9 billion shares all week until Friday's crash. Here's the tell-tale sign of a bear market--lower volume on the advances and higher volume on the declines. We saw multiple failures at high profile resistance, slowing volume as those resistance levels were hit and spiking volume as stocks broke down.
The big selling catalyst for Friday was the Non-Farms Payroll Report for May. Jobs are critical for a lasting economic recovery and investors carried a lot of hope into this report--estimates were being revised higher right up until the release. Goldman Sachs revised their estimates to 600,000 late in the week and President Obama was bragging in a televised speech about the strong jobs growth expected for May.
Unfortunately out of the 431,000 new jobs reported only 41,000 jobs came from the private sector--all the rest were temporary census works due to be laid off by summer's end.
When estimates for hiring in the private sector ran from 50,000 to 200,000 jobs that's a big whopping miss. Nobody expected less than 50K and almost everyone expected more than 100K. After adding 231,000 private jobs in April and 208,000 in March, 41,000 is a disaster. No wonder the markets sold off.
On top of a really bad total number the average duration of unemployment increased to 34.4 weeks---a new record. Plus a record 46% of unemployed workers have been out of work for more than six months. The number of newly unemployed workers (less than five weeks) increased by 2.75 million to 18.7% of all unemployed workers.
The U6 unemployment rate--which includes those working part time for financial reasons while looking for a new full time job--is now 16.6%. That is the real unemployment number not the often quoted official rate of 9.7%.
If the jobs numbers were not enough to scare investors out the door the new Hungarian government---sworn in less than a week ago---announced they are going to implement a new austerity plan to tackle the countries surprisingly bleak economic situation. The new administration warned it inherited a much worse financial situation than their predecessors had indicated and had found that the economic numbers had been falsified. Ouch--once investors know the books have been cooked it is really hard for a country (or company) to borrow any more money making further financing very difficult.
The new prime minister's spokesman said, "Hungary has only a slim chance of avoiding a Greek-style debt crisis although the administration would act quickly to avoid the Greek path." The Hungarian currency plunged over 2% against the euro and hit a new one-year low. The stock of the country's largest bank fell 11.1%.
The new center-right government won the April elections by a landslide capturing a two-thirds majority and ousting the incumbent socialists. The campaign platform was to boost growth via tax cuts and various economic stimulus measures. This was contrary to the new socialist wealth redistribution programs and tax hikes proposed by the incumbents.
Hungary borrowed money from the IMF and EU in 2008 to avoid a default. As a condition of the loan Hungary was supposed to freeze its deficit at 3.8% of GDP. The new administration claims the corrected numbers show the 2010 deficit to be 4.5% to 4.8% but some analysts are pegging it at more than 5%.
The sudden arrival of Hungary as another potential economic implosion is not such a big deal by itself--but it adds one more warning that unsustainable debt levels are endemic to Europe as a whole. Investors are now rightly wondering when the whole house of cards will fall--we heard about Greece in April, Spain in May and Hungary in June. The list of 'emergency countries' is growing and at some point soon it will be more than France and Germany can handle.
Now EU banks are refusing to lend to each other because of the potential balance sheet problems of owning too much sovereign debt. On Friday the European Central Bank or ECB reported overnight deposits from member banks reached a record 320.4 billion Euros--by far the most since the euro was created in 1999. Those deposits earn 0.25% so the ONLY reason member banks would park cash there is because they are extremely worried about a complete melt-down with massive losses. The ECB warned member banks will have to write off more loans this year than in 2009--the banking crisis is back--it's in the EU--and it's escalating.
A strong rumor surfaced Friday that Societe Generale--the international banking giant head-quartered in Paris--is facing huge derivatives losses. The euro plunged -1.6% on the news although the rumor was quickly denied by "unofficial" sources at SocGen. The company's stock fell -7.6% despite a soothing statement by the company. When asked by CNBC about the rumor a SocGen spokesman said, "If we had something to say, would have already communicated." Sounds like what the banks were saying right before our melt-down back in '08.
The economic calendar for this week is pretty light with the only material event the Fed Beige Book on Wednesday. There was a call by Kansas City Fed President Thomas Hoenig to raise the interest rate to 1% by the end of the summer so the Beige Book will be a key indicator for the June 22nd FOMC meeting.
Dallas Fed President Richard Fisher, St Louis Fed James Bullard and Philly Fed's Charles Plosser have also expressed reservations about the 'extended period' language. Jeffrey Lacker said he was "marginally comfortable" with the phrase and Atlanta Fed President Dennis Lockhart said he backed language promising rates near zero. "Waiting too long is probably less risky than moving too soon." We will hear a lot more of this kind of positioning before the June FOMC and it too will spook investors. Any threat of higher rates in this tenuous environment could be the last nail in this market's coffin.
Considering the events of the past week it is a wonder that we didn't close a lot lower. We had the Gaza peace armada and the blow up over IDF soldiers killing nine people. And in a chilling warning North Korea stated that war could erupt soon. "The present situation of the Korean peninsula is so grave that a war may break out at any moment" according to Ri Jang Gon, deputy ambassador. Plus we had an alarmingly dismal employment report and more bad news out of Europe--the question is...
HOW DO WE MAKE MONEY ON IT?
We've got two new super-high potential trades lined up this week and as you may have guessed--they are both bearish.
The other thing they have in common is they are both on indices or exchange traded funds--one of them goes down if the market goes down and one of them goes up if the market goes down--we'll position ourselves accordingly to profit on any further market weakness.
The bottom line is both of these positions are poised to make us money--a LOT of money--and we'll be jumping in first thing Monday!
We've got a market ready to move and two plays to profit from it--so let's get started...
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