S&P Back to Flat

Bounce, anyone?

Reversal of Sentiment, Reversal of Direction

Sentiment reversal: hard, fast uptrend, slow downtrend

This 15-minute chart shows just the opposite of yesterday. It illustrates that market sentiment has shifted. On the left side, the green candles moving higher are strong and fast. The red candles on the right are choppy, sloppy and interspersed with green candles, moving downward at a pace that is without conviction. The market has become bullish despite the current downward direction at the moment. I suspect we'll see another reversal somewhere near the flat line, and a higher close.
This surprises me despite that on the daily chart, the trend is still weakly downward  and despite that the news continues to reflect increasing economic weakness.

S&P Bounces Off 200-Day Moving Average

by Barry Ritholz at The Big Picture blog:


After gyrating much of the day, the S&P500 bounced off the the 200-day moving average (which also coincided with the December 2010 close)  just like a page out of a technical analysis textbook.   The bounce helped rescue Apple from some very ugly price action, which pierced its 200-day moving average for the first time since September 2008, x/ the flash crash, trading down to $318.33 before recouping most of its loss with a strong close...
But the current environment is much more difficult to navigate,  where a flock of macro swans — including European Debt, China hard landing, the QE2 endgame, Japan supply chain issues, global economic slowdown,  natural disasters, and commodity price inflation –  are batting the market around like a piñata.  This, therefore,  warrants more caution and greater risk mitigation.

And Speaking of Global Alarm Signals, China Flashes the Infamous Death Cross

from Tomi Kilgore at WSJ:


While US investors’ eyes may be on Greece, China’s Shanghai Composite just produced a “death cross,” a longer-term bearish pattern in which the 50-day moving average crosses below the 200-day.
The “cross” appeared one day after the index fell below the January low, which confirmed a long-term ”double-top” reversal pattern (the tops were seen in April and November 2010).
The last time a “death cross” appeared, in March 2010, the index rose slightly for a month before starting a 3-month, 25% slide. US stocks may be able to rise with China going nowhere, but it’s very doubtful they can if China’s in a bear market.
The Shanghai Composite is down 0.8% today, and the Hang Seng is down 1.2%. Most of the rest of Asia is down as well.
China’s stock indexes are among the worst-performing in the world so far this year, which may not bode well for the US market, Barry Ritholtz warned this morning.

IMF Cuts Global Economic Forecast

No worry, because stocks are up 75 points.

Charles Hugh Smith: From Here, a Dead Cat Bounce

This is what I've been expecting. Wall Street is determined to rally stocks despite the atrocious economic news in the past three months.


Submitted by Charles Hugh Smith from Of Two Minds
The Turning Point
Some technical analysts are calling for a major rally from here, but the massive injections of financial insulin don't seem to be reviving the sagging global economy.
The stock market and economy are both at a turning point. Analyst Martin Armstrong's Economic Confidence Model (tm) set the turn date as June 13/14, 2011.

In the stock market, a number of technical analysts are issuing strong buys based on the negative sentiment of so-called "dumb money"--small investors--and the number of stocks below their 50-day moving averages.

Others such as Armstrong are predicting that Greece has no alternative to default and the Euro is untenable as "one size does not fit all."

It is rare to find a market where the technical evidence is so compelling for a strong rally yet the fundamental basis for such a rally so lacking. Exactly where do Bulls think the growth and rising profits are going to come from?

The answer for the past few years has been massive Federal Reserve/Federal intervention and stimulus, and a weakening U.S. dollar that boosted overseas profits via the legerdemaine of currency devaluation.

But three years of these policies have accomplished nothing but load the taxpayer with staggering amounts of debt: none of the causes of the 2008 implosion have been fixed or even addressed. As Armstrong notes, the massive interventions did not shorten the crisis, they have prolonged it.

This reality has filtered down to the political swamp, and now the politicos are hesitant to bet their own futures on additional trillions in stimulus and quantitative easing. For the first time in memory, the Federal Reserve is on the defensive. Simply put, its policies have failed to accomplish anything except prop up a rotten, insolvent banking sector that needs to be declared bankrupt and swept into the dustbin of history.

As I have noted here before, the next round of QE (quantitative easing) will fail to inflate the stock market regardless of its size or tricks. The fact that QE3 is needed will spook everyone who understands that it is a last-ditch effort to keep the Status Quo financialization from imploding, and since QE2's sugar-high was so brief, others will be spooked by the possibility that the next high will be even shorter.

This is the dreaded Diabetes Financial Syndrome--the Fed is pouring ever larger amounts of financial insulin into the system, but the financial "body" no longer responds to this insulin. The financial system then goes into toxic shock and implodes.

Let's look at two charts for context. Here is the S&P 500 from 1965 to 2011. Hmm, are there any aberrations visible here, any gigantic spikes of speculative frenzy? Just because these spikes of speculative, financialized frenzy have been normalized doesn't mean they are no longer speculative, financialized frenzies.



Has the economy really been healed? If not, then what is the basis of the market's spectacular rebound since 2009? We all know the answer: $6 trillion in Federal financial insulin and another $2 trillion in Federal Reserve insulin. The entire rally, in other words, is an artifact of Central bank/State intervention.

Courtesy of dshort.com, here is an inflation-adjusted chart of the S&P 500. This chart clearly illustrates that unprecedented Central State stimulus and intervention/manipulation have juiced the market higher than previous post-crash highs.


But the whole financial-insulin project is looking a bit long in tooth compared to previous post-crash markets. In the long run, perhaps we can attribute this extension of the euphoric high of "recovery" to the Fed's QE2, which pumped half a trillion dollars into stocks in a matter of months.

Short of the Fed simply buying trillions of dollars in stocks outright, then it looks like this "recovery" rally is about to have a Wiley E. Coyote moment, as it has raced off the solid ground provided by the Fed's QE2 injections and is now poised in thin air.

Of course the market could rally from here, but it's hard to see on what basis other than a technical dead-cat bounce. The Fed could announce another round of intervention, and that would certainly give the comatose body a jolt. But for how long?

If it does respond to gravity, then we might want to re-visit the definition of "dumb money:" small investors have been pulling money out of the stock market all during the QE2 insulin-rush rally while the "smart money" has been piling in, blubbering piously about the key tenet of their religious faith, "don't fight the Fed."

So which do you think is all-powerful, smart money--the Fed or gravity? We're about to find out.

Wall Street and Main Street Part Ways

from Bloomberg:

Main Street is out of step with Wall Street.
The Bloomberg Consumer Comfort Index has stalled near its recession average as the Dow Jones Industrial Average has risen 83 percent from a 12-year low in March 2009. A tight correlation between the index and Dow that lasted more than two decades has broken down as joblessness above 9 percent, stagnant wages and near $4-a-gallon gasoline outweigh the benefits of higher share prices, even after a 6.6 percent retreat in the Dow since the end of April.
“Consumers are fairly depressed, yet the stock market continues to improve,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in an interview

Eurodollar Futures Plunge on Europe's Debt Debacle

This is coming to the United States treasury markets sometime, possibly soon!

And Now, the Bounce

Right at the Dow flatline.

Market Sentiment: Choppy Going Up, Hard and Fast Going Down

When I see this candlestick pattern (see description next paragraph), I take it as a reading of market sentiment. The S&P 500 is now back to flat for the day. The Dow is lagging behind and is still positive; since the Dow was up much higher in percentage terms, this is not surprising.


Notice on this chart that the uptrend was choppy and sloppy going up, but hard and fast going down. This tells me that traders are uneasy taking a long position, but quick to liquidate and/or short when the market turns. Note on the left the frequency of red, downward candles and long wicks in an uptrend. Note also on the right the lack of green candles and the rapidity of the downward move.

Reversal! Stocks Tumble

Was it a stark dose of reality? Very chopping market today. Difficult to trade!

Philly Fed Shows Economic Contraction, But Stocks Still Higher

from the Philly Fed's own report:

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 3.9 in May to -7.7, its first negative reading since last September (see Chart). The demand for manufactured goods, as measured by the current new orders index, showed a similar decline: The index fell 13 points and recorded its first negative reading since last October. The current shipments index fell just 3 points but remained slightly positive. Firms reported declines in inventories and unfilled orders, and shorter delivery times.

Firms’ responses suggested little overall improvement in the labor market this month. The current employment index remained positive for the ninth consecutive month, but only 14 percent of the firms reported an increase in employment, while 10 percent reported a decline. Only  slightly more firms reported a longer workweek (14 percent) than reported a shorter one (12 percent) and the workweek index was down only slightly from May.

It gets worse. Look what the survey said about employment:

The future general activity index decreased 14 points this month and has now dropped 61 points over the last three months (see Chart). The indexes for future new orders and shipments also declined, decreasing 9 and 14 points, respectively. The index for future employment fell 17  points and has declined 32 points in the last two months. Still, slightly more firms expect to increase employment over the next six months  (21 percent) than expect to decrease employment (16 percent).

Wall Street Grasping at Straws

Initial unemployment claims fell, but remain elevated and above 400,000. Wall Street is grasping at straws to find any news that would allow them to perpetuate the Pollyanna Party. Hence, a rally!

Ouch! Futures Setting Up for Another Downer Day

Stocks Freefall After All Support Taken Out

Dow off more than180 points!

No Support for Stocks

We just took our yesterday's lows. Next stop 1259.50.

All Yesterday's Gains At Risk

update: All yesterday's rally gains have now been erased. This same phenomenon occurred on May 31st and June 1st. May 31st saw a rally of about 90 points, and the Dow plunged 280 points the next day.

Home Builder Sentiment Declines

"After holding at a low but steady level for the past six months, builder confidence in the market for newly built, single-family homes declined three points in June to a reading of 13 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The last time the index was this low was in September of 2010. "Builders are being squeezed by the continuing weakness in existing-home prices – against which they must compete -- as well as rising material costs," said NAHB Chairman Bob Nielsen

Industrial Production Flat

"Industrial production edged up 0.1 percent in May, the second consecutive month with little or no gain. Revisions to total industrial production in months before May were small. In May, manufacturing production rose 0.4 percent after having fallen 0.5 percent in April. The output of motor vehicles and parts has been held down in the past two months because of supply chain disruptions following the earthquake in Japan. Excluding motor vehicles and parts, manufacturing output advanced 0.6 percent in May and edged down 0.1 percent in April; the decrease in April in part reflected production lost because of tornadoes in the South at the end of the month."

Stagflation Rages, Manufacturing Falters

Is it any wonder both both stocks and treasuries plunge on this news? Treasuries are now recovering, but higher inflation is going to take its toll, as it did yesterday. 

from Zero Hedge:


June brings us much more centrally planned stagflation. CPI increased 0.2% in May, higher than expected 0.1%, and up 3.6% Y/Y. This is the 11th consecutive increase in inflation. And so much for the CPI ex-Food and Energy which came at +0.3% on expectations of 0.2%, up from 0.2% in April: "The index for all items less food and energy increased 0.3 percent in May, its largest increase since July 2008. The indexes for apparel, shelter, new vehicles, and recreation all contributed to the acceleration, rising more in May than in April. These increases more than offset declines in the indexes for airline fare, tobacco, and personal care." More on the Chairman's failure to rein in inflation in 15 minutes: "The food index rose in May as well. The food at home index repeated its April increase of 0.5 percent as four of the six major grocery store food group indexes increased, with the index for meats, poultry, fish, and eggs rising the most. In contrast, the energy index, which had been rising sharply, declined in May. The gasoline index decreased for the first time since last June, although the index for household energy increased. The upward trend among the 12 month increases of major indexes continued in May. The 12 month change in the all items index, which  was 1.1 percent as recently as November, reached 3.6 percent in May. The energy index has increased 21.5 percent over the last 12 months, the food index has risen 3.5 percent and the index for all items less food and energy has increased 1.5 percent. All of these figures have been rising in recent months." But the real action was in the Empire Manufacturing Index which plunged from 11.88, and forget about expectations of 12.00, printing at -7.79 in June. The contraction is now confirmed. This is the first contraction since November 2010 when QE2 began. Hint: QE3 is coming. Also, the future general business conditions index fell thirty points, reaching 22.5, its lowest level since early 2009. And the kicker: margins continued to collapse as prices paid fell less than prices received. This is what stagflation is pure and simple; it has also been Zero Hedge's keyword of 2011 since January.
From the Empire State Mfg Index:
The Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated in June. The general business conditions index slipped below zero for the fi rst time since November of 2010, falling twenty points to -7.8. The new orders and shipments indexes also posted steep declines and fell below zero. The index for number of employees dropped fifteen points to 10.2. The indexes for  both prices paid and prices received were positive but lower than last month, suggesting that increases in input prices and selling prices had slowed. Although future indexes were generally above zero, they were well below last month’s levels, indicating that the level of optimism  about the six-month outlook had deteriorated significantly.
In June, the general business conditions index fell below zero for the first time since November of 2010, declining a steep twenty points to -7.8. Eighteen percent of respondents—compared with 23 percent in May—reported that conditions had improved over the month, while 25 percent, up from 11 percent last month, reported that conditions had worsened. The new orders index fell twenty-one points to -3.6, and the shipments index tumbled thirty-four points to -8.0. The unfi lled orders index fell to zero. The delivery time index slipped fi ve points to -3.1,  and the inventories index dropped ten points to 1.0.
Level of Optimism Deteriorates Significantly
The six-month outlook was notably less optimistic in June than in May. The future general business conditions index fell thirty points, reaching 22.5, its lowest level since early 2009. While the index was still above zero—an indication that conditions were expected to improve in the months ahead—its June decline represented the second largest drop in the index in the history of the survey. The future new orders index fell thirty-two points to 15.3, and the future shipments index fell twenty-fi ve points to 17.4. The future inventories index retreated thirteen points to -9.2, suggesting that manufacturers expected inventory levels to fall over the next six months. Future price indexes fell but remained positive, implying that price increases were expected, but would occur at a slower pace than was expected last month. The index for expected number of employees fell fourteen points to 6.1, and the future average workweek index fell to -2.0. The capital expenditures index slid four points to 26.5, and the technology spending index dropped fi fteen points to 14.3.
And the kicker: Margins continue to collapse as drop in Priced Paid is smaller than in Prices Received:
Price indexes posted their first declines in several months. The prices paid index fell fourteen points, to 56.1–still a relatively high value, but a sign that price increases were smaller in June than in May. The prices received index retreated seventeen points to 11.2, with the share of respondents that reported an increase in selling prices falling from 33 percent last month to 17 percent this month. Employment indexes were also lower. The index for number of employees remained in positive territory, indicating that employment levels increased, but the index fell fifteen points to 10.2. After reaching a relatively high level last month, the average workweek index tumbled twenty-six points; at -2.0, the index suggested that hours worked fell slightly.
Summary:

Monthly CPI:

Inflation Surges, Stocks Sag

Stocks Fall Off Cliff

More Melt-Up for Pollyanna

Stocks Spike Higher Still on Retail Sales, PPI Data

from Zero Hedge:

US May PPI came in at 0.2% sequentially, on expectations of 0.1%, and down from 0.8% previously. This was the 11th consecutive increase in PPI. The 12 month change in PPI came at a multi year high 7.3%, much higher than the 6.8% expected, which supposedly is a good thing: inflation is back. PPI ex food and energy was in ling with expectations at 2.1%. Elsewhere, the May Advance Monthly Sales came at -0.2%, on expectations of -0.5%, down from a lower revised 0.3%. Retail sales ex auto and gas came at 0.3% on expectations of 0.2%, with the previous revised lower to 0.2% from 0.3%. Stocks appear to enjoy the increasing inflation on declining economic output.

Stocks Spike on Lower-Than-Expected Inflation in China

Stocks Lose Their Nerve, Close Almost Flat

The Dow closed up only 1 point.

Go Figure! Euro Strengthens on Greek Debt Downgrade

Big Bounce

Wall Street traders seem to be eager for an opportunity to buy, unless more morose market conditions and negative economic data overwhelm that desire. Strong buying prevails for the moment. Here comes the Pollyanna Party! It's easy to rally the drunken troops on a day when there is no news, especially following so much excessive spending and stimulus over the past 3 years.

Economy Summarized

Excellent economic assessment and summary courtesy of David Rosenberg and Zero Hedge:

David Rosenberg provides the key bulletized market observations that have marked the broad capital markets over the past few months.

• $950 billion of paper equity wealth has been wiped off the map in the past six weeks.
• The Dow is below 12,000 for the first time since March 18th.
• The Transports are down more than 8% from the nearby highs and are down for the year as well
• The Transports/Utilities ratio has broken down to its lowest level since November 9th of last year.
• The Nasdaq is now down for the year (-0.3%)
• The Russell 2000 index is also down for the year (-0.5%).
• The S&P 500 is just 1.1% away from seeing the same fate.
• The S&P 500 has declined in each of the past six weeks, the longest losing streak since June-July 2008.
• The S&P 500 has fallen below its 150-day moving average after breaking below the 50-day and 100-day trendlines earlier in this corrective phase; the 200-day is the next level of support.
• For the Dow, this is the longest string of weekly declines since the Fall of 2002.
• The total six-week decline in the broad market is nearly 7% ... a slow bleed.
• Junk bond spreads widened 25 basis points last week, more evidence of risk re-rating.
• Investment-grade bond spreads widened out 14bps and new issue activity ($0.63 billion) was the lowest of the year.
• Bank of America is back to being a $10 stock after a two week 8% slide — how do the bulls dismiss this out of hand? It's the biggest consumer bank in the country.
• In the past six weeks, Energy, Industrials, Materials, Financials and Consumer Discretionary have all rolled over significantly. The defensives have outperformed dramatically — Healthcare, Utilities, Telecom, and Consumer Staples.

The last bullet point is precisely in line with our May 16 proposed QE Unwind compression trade.
And here is what Rosie believes is ailing the market. Nothing really new here:

• The economy is cooling off and there is no policy stimulus in the pipeline. Ben Bernanke did give a sombre assessment of the economy last August in Jackson Hole but at the same time threw Mr. Market a bone by hinting at a new round of liquidity expansion. Last week, the Fed Chairman delivered an even more sobering outlook and did not offer any olive branch this time around.
• So here we have it economic deceleration but with no policy response. NY Fed President Bill Dudley also gave a speech that was very similar in tone to Bernanke — maybe even more cautious, and while repeating the refrain about second-half recovery prospects he listed an array of downside risks to that forecast. He, Bernanke and Yellen ('The Big Three') would love to do another round of QE (Yellen also gave a speech on Friday on housing) but the bottom line is that they are gun-shy after receiving so many complaints from foreign governments, Congress, Wall Street and Fed Bank Presidents that they just do not have the political capital to engage in more stimulus (though it will come at some point but maybe at a similar strike price as last August; dare we say, 1,040 on the S&P 500).
• While the economists have cut their numbers, the equity analysts have yet to do that with their earnings numbers. That comes next.
• Leading indicators are suggesting that we are in more than just a "soft patch" — the jargon of Wall Street economists. The ECRI leading economic index has fallen now for four weeks in a row!
• Global cooling. The Chinese economy is also slowing down with auto sales declining now for two months in a row and the PM! perilously close to the 50 level. Retail sales in Brazil fell 0.2% in April, the first decline in a year and the news came on top of a sudden sharp slowing in industrial output. U.K. factory output fell 1.7% in April as well and France posted a surprising 0.3% drop in industrial production.
• Tightening monetary policies to combat rising inflation pressure across the emerging market world.
• The situation in Europe is untenable — Germany's finance minister is drawing a line in the sand and calling for some sort of Greek restructuring in which bond holders will also have to take a haircut. This has caused the ECB's Trichet to almost go apoplectic. Of course, the ECB is holding onto hundreds of billions of dollars of P.I.G.S. debt on its balance sheet so any haircut would render the central bank insolvent in its own right.
• Threatening not to repo restructured debt is like saying to the Greek banking industry to kiss itself goodbye (a likely prelude to Greece exiting the eurozone, by the way). But Trichet is not elected, the likes of Angela Merkel and Wolfgang Schauble (the finance minister in question here who came right out and said a Greek restructuring is "inevitable") just happen to be, and it looks like the German taxpayer-funded bailouts are coming to an end. See Rift Over Greece Deepens in Europe on page B1 of the weekend WSJ. Some markets are starting to price in the inevitability of sovereign debt defaults in Europe, with 5-year credit default swaps soaring to record highs in Greece, Ireland and Portugal.
• One can't help but think that the ECB rate hike (and the threat to do more!) will go down as a colossal mistake the same central bank made in the summer of 2008. Considering that most of Spain's mortgage market is variable-term and the housing market is beset with tremendous excess supply and downward price potential, the ECB rate hike is like a stake in the heart — to combat perceived inflationary pressures in Germany.
• The slide in U.S. bond yields is telling you that an economic slowdown is here and here to stay beyond Q2, despite consensus views to the contrary. The fact that copper was down in the same week that oil was up says two things here — the former reflects the falloff in Chinese imports; the latter tells you a thing or two about just how thinly balanced the global demand-supply for crude is given that the move back to $120/bbl was all due to discord within OPEC in terms of whether or not to bump production up (looks like the Saudis will be going it alone).
• Actually, it is all about discord here — within OPEC, Congress and the White House (see the editorial piece The Economy and Washington on page 8 of the Sunday NYT 'Week in Review' section), the confines of the Fed, the ECB and Germany, etc. Discord, instead of decision-making, in the current environment is not a good thing— leaving the financial markets in a heightened state of uncertainty.

"B" Is For Bounce

Stocks Collapse In Sell-Off

After being up 65 points, stocks have collapsed again and are decidedly in the negative today. I'm surprised, because I expected a bounce at Friday's close.

S&P 500 Turns Red

Stocks Back to Flat on Slow News Day

Choppy, Sloppy Stocks

Volume is low, too. Market has just turned bearish for the first time today.