Is This Market Really Sick Or Too Big To Fail Part II

May 24th, 2012
in Gary's blogging

Yesterday, in part one of this, so far, 2 part series, we pointed out that indexes and equities alike were at or near pre-existent supports and their 200 day MA's. All of which posed some serious barriers to descend any lower. Not that it can't be done, but going below the snow line, sledding becomes tougher. However, some of the now exposed boulders poise some real and present dangers in breaking up the sled if it isn't steered in another direction and soon. Eurobonds comes to mind as a potential boulder where Merkel says nein and Hollande and Monti say oui and si to the notion.

There are many, many moving parts to the World markets and how each effect the US markets remains the topic of this article. Here is where we are today and probably will be for the next 5 or 6 sessions.

Follow up:

My feelings exactly.

Let's Stop All The Pretending by David Moenning

We need to call a spade a spade here. So many analysts, managers, and pundits come on TV to tell us - with absolute certainty, by the way - (a) what the market is going to do next, (b) what will happen next to the economy, (c) what the Fed will do and when, and (d) what will happen in Europe. However, the bottom line is that nobody can predict any of this stuff because all of the above intertwined as well as tied to data that we don't have yet and events that haven't occurred yet. So, as investors, we all need to collectively stop pretending we know what is going to happen next.”

In examining the facts and trying to make sense of it all, let's start here. Gold recently tested its lows and rebounded. Where it goes from here is anyone's guess. I am not going to bet on this one and neither should you.

>>>>>  Click on chart for a larger view  <<<<<

Another barrier has been reached with the EUR/USD pair now trading at 1.2589. This FX commodity is testing the same area lows set in August 22, 2010 and January 8, 2012. Traditionally, the US markets go up when the Euro goes up and that direction is in jeopardy. If this support for the Euro is broken, by going lower, count on the US dollar to rise and the US markets to sink. But again these barriers have to be broken and so far they haven't been.

And just about when you think you have a grasp of the current situation you find out that Mr. Market has another trick up its sleeve making any prognosticating a foolish jester in futility. The experiment that Jim O'Neill did below was not only an interesting one, but one describing the 'herd mentality' when the sheeples are wired to follow the crowd in uncertain times.

The cab driver analogy is also a good one, as I was recently informed by an unformed soul on several excellent buys. The signs are out there, but I am hedging my bets by keeping my head down until this market decides what it is going to do over the next couple of weeks.


How about a show of hands on who thinks the euro is headed lower, asked Goldman's Jim O'Neill at a January hedge fund conference, when the currency was about $1.26. Nearly every hand in the room shot up. Six weeks later, the euro was buying $1.35. "If Europe says something good," writes Upsidetrader, look for a big reversal in the euro, the dollar, and stocks.”

Well we are there and the 'Big Test' is in the making as more negative connotations from the Eurozone keep pouring in. But will the bad news continue long enough to drag the markets below these supports, that is the real question today.


U.S. Flash PMI (first ever) for May 53.9 vs. April's final read of 56.0. It indicates the slowest level of expansion in three months. New Orders 54.8 Vs. 56.9. Backlogs of Work 51.7 vs. 52.2. Input prices 56.3 vs. 63.1. Output prices 52.8 vs. 53.9.”

It looks like Leavitt is being more bullish than I care to be, but I'll jump on that wagon if he is correct in his assessment. Like he states, the unexpected can happen as Mr. Market likes to do the unusual.


It looks like scenario #2 may be in the beginning stages. Scenario #2 was “we need a test of the low before the real move up can begin.” I’m not predicting the indexes will be off to the races soon, but I am saying to be flexible and open-minded. The unexpected does happen, and if you think so much damage has been done to the charts that the market can’t possibly rally for more than a few days, look no further than last November when the S&P broke down from a symmetrical triangle pattern and then rallied straight up 100 points before settling in a steady uptrend.”

This market will break one way or another and it will be soon and stealthy. I say stealthy because of several things. One is that the mattress money is still now where to be found keeping volume levels low and the markets slow moving. The old cash crowd isn't about to reenter anytime soon, so not much help there in moving the markets.

From Financial Planning:

U.S. stock funds can’t seem to get any love these days, posting 13 consecutive weeks of outflows. For the week ended May 16, investors pulled an estimated $3.45 billion from the funds, according to the latest statistics from the Investment Company Institute. That’s $1.10 billion more than they withdrew from the funds a week earlier. Since the beginning of the year, the funds have lost $38 billion in outflows.
Non-U.S. stock funds also took a beating, losing an estimated $117 million in outflows for the week. They took in $1.04 billion the week before. $38 billion yanked out of stock funds in less than five months this year.  And who could blame them?  Once the bullies shove you into a locker and hold your head down in the toilet, you learn to take a different hallway to homeroom.”

Another reason the markets will slowly drift is becoming more evident to me is that any QE won't be initiated until AFTER the elections. This partially due because of political pressure from the right not to do so and the FED's unwillingness to appear to be Obama's lap dog. Either way the investors will be in a conundrum as to whether or not a QE is going to happen and may hold out doing anything. But watch out for the QE 'rumors', with out a doubt, to be started soon so DaBoyz can run up the market.

The investment funds are not likely to cash out as that process is a big deal with many jobs on the line. So that process of doing nothing will impede any sudden, at least lasting, downside movements.

If the market does turn to the 'Dark Side' and breaks down through these all important zones of supports, it will be slow as if we are testing the waters. But be assured it will continue to melt down because it can't move any faster. No 'Flash Crash' will be making its rounds this summer, but rumor saturated news will be.

Another negative bit of news is that Hewlett-Packard says it is going to drop 27,000 jobs in a move aimed at slimming down the struggling tech giant. We are hearing more and more tidbits this confirming the economy is not actually growing quite as fast as the Government and bullish pundits would like you to believe.


H-P earnings top forecasts; confirms massive restructure. Hewlett-Packard (HPQ) shares jumped 8.9% pre-market after the company's FQ2 earnings beat expectations and it confirmed it would slash 27,000 jobs as part of a widely leaked restructuring plan. H-P said EPS fell to $0.98 from $1.24 and revenue slipped 3% to $30.69B, and it provided FY 2012 guidance above consensus. The computer maker's revamp will save $3B-$3.5B a year by the end of FY14, although it expects to record a $1.7B pretax charge.”

And lastly we have China's 'problems' sitting on our doorstep and likely to cause major disruptions in World markets.

Here is one headline: China HSBC Flash PMI Declines, Economy Now In Contraction For 10 Of Past 11 Months

Here is another story.

China's Economic Slowdown Foreshadows Trouble for the U.S.

Industrial activity is down. Retail spending and investment are down. Trade is weaker than expected.”

China's economy showing signs of trouble

China, often portrayed as an unstoppable force in the media and among those who have given up on the United States, is on the verge of a major growth reversal bordering on a potential collapse.

Per the Investor's Business Daily:

The cause: China's imploding real estate market.  Since late summer, Chinese home prices have tumbled, partly a result of Chinese government policies intended to keep the economy from overheating.
Barclay's Capital Research predicts China's home prices will fall 10% to 30% next year, hitting the economy hard -- and putting at risk the Chinese economy's 20-year string of 10% average GDP growth.
Much of China's growth over the past three years has been fueled by a massive pile of debt.  Chinese banks have lent an astounding $8 Trillion since 2008 -- an amount that dwarfs the Eurozone's $4 Trillion in debt.


China's manufacturers still hurting

China's manufacturing sector continued to shrink in May, according to preliminary data released Thursday.

HSBC's Flash Purchasing Managers' Index fell to 48.7 in May from 49.3 the previous month. Any reading below 50 indicates the manufacturing sector has been shrinking.

Keep your powder dry and cash in your pocket. I will be off tomorrow for the Holiday Memorial weekend, but will return on Tuesday the 29th.

To contact me with suggestions or deserved praise:

Written by Gary

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