Verdict on the Fed Is In -- Stocks LIKE It!

Having now surpassed 300 points on the Dow today, it appears that the stock markets like what they heard from the FOMC statement this afternoon, since the stock market indexes are higher, and treasuries have begun to sell off. While 80% of the rise occurred prior to the statement, it appears to have been mostly in anticipation of that statement or as a reaction to further weakness in the price of crude oil (or perhaps the combination of both). It appears that the statement by the Central Bank is perceived as modestly more hawkish toward inflation, but without any sign of an imminent tightening of interest rates in the mid-term future. The Fed Fund futures are higher for the December 08 FOMC meeting.

Following Solid Rally, Grains Sell Off Again

After a good rally throughout almost the entire trading session, grains sold off again in the closing hour of the trading day, leaving the session relatively even for the day. The Deustche Bank Optimum Yield Agriculture Excess Return Index, as shown above intra-day, ended modestly higher on the daily chart (not shown). Volume was very heavy -- about 1/3 greater than yesterday, and the largest volume in about three weeks! This high volume and higher close is probably a sign of greater relative balance between buyers and sellers in the grain markets. Wheat was higher throughout the entire day, until just the closing minutes of the session. This conflict between buyers and sellers appears to be a good recipe for more consolidation and range trading. However, the undercurrent of weather and the Dollar always play a potent role as well. The most important USDA crop report of the season will be released one week from today.

Fed Decision Aftermath

Stocks -- moderately higher
Treasuries -- modestly lower
Crude Oil -- somewhat lower
Grains -- n/a (market closed at moment of decision)
Gold -- lower

More Great Grist from John Mauldin et al

John Mauldin sent out a great article written by one of his buddies, Michael Lewitt of Hegemony Capital Management, this week. This is great stuff! After listing the names of the 19 private companies that were "protected" by the SEC in it's recent short ban, he makes some fascinating analytical points. Here is a tiny sample:

Among the more interesting aspects of this list is the fact that more than half the names are non- U.S. firms enjoying the protection of the U.S. regulators and the fact that some large U.S.-based firms that are clearly being pummeled by short-sellers are missing from the list (i.e. Wachovia Corp., AIG International Group, Inc., Washington Mutual). The ostensible basis for inclusion on the list - status as a primary dealers plus Fannie and Freddie - speaks to the reactionary nature of the rule-making. Finally, this desperate measure is yet another example of the capitalism-for-the poor, socialism-for-the-rich economic model that American financial authorities have adopted over the past two decades.

Wow! One certainly must wonder why some foreign companies were protected, while feeding some large and vulnerable American companies to the sharks! Maybe it's time for more torches and pitchforks as the American people march on Washington!

What a great newsletter. Here is the entire copy from John Mauldin:

Survival of the Unfittest

Grains Gains

This composite chart for the grains today demonstrates that despite the strength of the Dollar today, all three of the grains have firmed up and moved forcefully higher. Given that this rally has occurred while the Dollar was also rallying, it underscores the strength of the grain rally. It takes a great deal of buying to break through the bearish current of today's Dollar rally.

Resolution: Battle of the Grains

The grains have all battled resolutely back from what was expected to be another round of selling today. This is remarkable, given the strength of the Dollar today. There is apparently some very firm buying interest beginning to hunt for bargains. This corn chart for today shows the push and shove that exemplifies the grain markets today. Soybean and wheat prices are even more firm today.

Stock Index Futures Bolt Higher

In anticipation of good news from the Fed this afternoon, stock index futures have shown strength today also. Buy the rumor....?

Shock -- Grains Move Unexpectedly Higher

Grains this morning have shot higher at the beginning of the day session, surprising many market analysts, including me. Weather is usually the driver at this time of the year. As I've said many times before, anything can happen!

US Dollar Gaps Higher

Everything seems to be following the lead of the US Dollar today. Note the gap higher on the tick chart (right side) for the Dollar Index futures. The daily chart is on the left. How long has it been seen we have seen genuine Dollar strength? I had noticed last night that the Euro was plunging, even during evening hours in the United States, when the Europeans were asleep. I had no idea what the cause was.

The Dollar is showing even greater strength today, more than I have seen in many months. As a result, many commodities are plunging, including grains, crude oil, and metals, and many currencies are also weaker against the greenback. Even the currencies that were trending higher, and that I highlighted over the past few days, are giving up some ground today against the Dollar. Treasuries are selling off today, as higher interest rates are often contemporary with a stronger Dollar. Welcome back, greenback!

From Bruce Knorr's commentary this morning on farmfutures.com:

The dollar continues to rally this morning ahead of the latest policy statement from the Federal Reserve on interest rates... The Fed is expected to hold rates steady, with traders watching for shifts in the central bank’s focus on inflation that could signal higher rates ahead.

With commodity prices having plunged so much in the past several weeks, this could give the Fed more than ample cover to surprise the market with a somewhat dovish statement this afternoon. It should be exciting, regardless of what the Fed does.

Snowball on the Dollar Downhill

I have written several times to correct erroneous ideas about the role of speculators in the commodity markets.

Now, I'm going to write why I feel so passionately about this subject.

Frankly, over the last two months, I have traded primarily treasury and stock index futures. Since the soybean bull ended, it simply has been more difficult to trade, and less profitable. One reason may be that fewer speculators are trading that market. It's less liquid, and more erratic. I can just as easily trade stocks, treasuries, gold, or whatever else. My trading methods will work regardless of which vehicle I trade. I don't really care which one I use.

I don't frequently trade crude oil because the market moves so quickly that I have difficulty obtaining accurate executions. I only trade markets that are very liquid, provide me with good executions, and offer minimal slippage. The S&P 500, treasuries, and Eurodollar futures are the best. Eurodollar futures don't show much movement, so I don't bother with them.

As the U.S. Congress continues to spasm uncontrollably from bail-out to bully in the financial markets, they exponentially increase the risk of causing severe or even permanent (see #4 below) damage to their functions and stability, despite the claim that stability is their goal.

If Congress attempts to force traders out of the commodity markets, it will have one or more of the following effects:

1. Higher Commodity Prices -- The commodity prices themselves will gyrate out of control, as they have before when liquidity was driven from the financial markets. Erratic price movements that skyrocket one day and plunge the next were the reason why the futures markets were created in the first place. The more liquidity that exists in the futures markets, the more stable they become, because no one market participant can control the market. Traders provide this liquidity. Liquidity is both a benefit and a protection for all market participants. It benefits everyone!
   One example of this is the wild price swings we see for commodities that are not traded in the futures markets. Not only do prices swing wildly and erratically back and forth, but these commodities have, over the past year, risen much more rapidly and much higher that the futures-traded commodities. Higher prices are the certain result when speculators are forced out of the futures markets.
   The super rich aren't deterred when Congress slams the door on traders, either. They can simply buy the farms that produce the commodities, the mines that produce the precious metals, and the land that produces the oil. Then, they can just sit on those assets until prices rise to more competitive levels. They engage in hoarding!
   
2. Long Lines at the Gas Pump -- If Congress attempts to manipulate and bully commodity prices lower, those commodities will end up in parts of the world where they are welcomed and where people are willing to pay market prices for those same commodities. Long lines at gasoline pumps in the United States will be the result. Less oil will come to these shores, and that means shortages and long lines to obtain the scarce commodity, assuming it is available at all!
   
3. Collapse of the Dollar -- If higher taxes and unwelcome financial markets leave investors feeling that their capital is at risk in the United States, they will move those funds elsewhere. I saw this in South America, and despite the disastrous consequences, tyrants continue to attempt to bully the markets into submission. It never works, and it always has terrible consequences. One of these consequences will be that as more and more people send their money outside the United States, the volume of selling activity will cause the US Dollar to decline even faster. As the phenomenon snowballs, it accelerates, and the Dollar could collapse in a Weimar Republic-style death spiral.
   In January, when Jerome Kerviel, the rogue trader at Societe Generale, was discovered, the liquidation of about $16 billion of his trades caused the Dow futures to plummet 570 points in a single day. It has similar effects on many futures, including crude oil, gold, and grains. Fortunately for the U.S. stock market, it was closed that day for the Martin Luther King holiday, and the market recovered before the open the following day.
   If just $16 billion of rapid capital movement has such an impact on the financial market over a holiday, what would the impact be if $1-$2 trillion moved out of the United States over a period of several weeks or months? The impact could be cataclysmic for the Dollar! As one government followed by another decides to liquidate their Dollar reserves, the Dollar will accelerate downward. This, in turn, causes the prices of food and fuel to skyrocket in inflationary mushroom clouds. It could initiate panic selling not only of the greenback, but of US treasuries also, setting off waves of hyperinflation. Is that an apple cart we want to risk upsetting?
4. We Lose the Markets to Overseas Competitors -- The United States no longer has a monopoly on the world's financial markets. The fact is that there is more money elsewhere, and competitors are chomping at the bit to attract more capital to their own markets. When investors around the world find the United States financial markets inhospitable, they will simply transfer their funds to other futures exchanges around the world. There are active and liquid futures exchanges in Europe, China, India, Singapore, Dubai, and several other countries. Once those customers are gone, so are the jobs and the competitiveness of our markets. Do we want to give up still another dominant market position, and send still more business and more jobs overseas? Why do you think that commodity expert Jim Rogers moved his family and business to Singapore, and is liquidating all his Dollar holdings? Because the markets elsewhere are more hospitable!
   

I don't care about the market. I DO care about the Republic!

Grains Begin Trading Again

Within just 30 minutes, buyers in the grain market stepped in and eliminated the build-up of sellers. There was an ask pool of more than 40,000 for soybeans. The ask pool was eliminated so that both corn and soybeans have begun trading again. This is fairly common. I have even seen days in which some grains reached both their limit up and limit down prices on the same day! Anything can happen!

Corn and Soybeans Limit Down

Guided lower by the collapse in crude oil prices, corn and soybean prices have both reached limit down today. Both show solid volume in the ask pool, also. What an amazing day!

Crude Tosses the Stock Market a Bone

Stock markets have gotten their second wind today as the price of crude oil has suddenly plunged more than $5/barrel, briefly dipping below $120/barrel. The Dow momentarily moved into positive territory for the day.

If crude oil continues to drop, it will likely create a stock market rally and possibly bring the U.S. economy back from the brink of a recession. However, with a recovery, the global supply shortfall in oil will eventually lead crude and other commodity prices to rebound just as rapidly as they fell.

Last night, when crude oil rose $1 at the open in the face of Edouard, but then didn't move higher, it appeared to me that this was a sign of crude oil weakness. In a downtrend, even bullish news is often quickly dismissed, and this was a good example of that phenomenon manifesting itself. Instead of prices rallying higher, traders will use these events as opportunities to enter the downtrend and sell into the rallies. I think that's what we're seeing today. All of the news was bullish, but traders have used it as an opportunity to sell the market instead.

There may be even more bearish news ahead for the price of crude oil. Negotiators announced this morning that they may be close to a break-through in negotiations that could bring peace to Nigeria, and restore 1,000,000 barrels a day to the world crude oil market. If that occurs, we could soon see crude oil prices well below $100.

More Commodity Weakness

Commodity prices are showing some signs this morning of a possible renewed break-out to the downside. The Dow Jones AIG Commodity Index has struck a new low this morning for this correction, suggesting more downside risk.

Stocks Dip Triple DIgits

The Dow is now down triple digits this morning, with selling being the order of the day. It has been a gradual, bumpy slide, so sentiment is apparently not universally bearish. The FOMC minutes to be released this week may keep a lid on volatile markets in either direction. No one expects the FOMC to change rates anytime soon. However, the risk of a surprise, I believe, is to the dovish side this week.

Grains Sell Off at Open

Last Friday's rout continues this morning across the board in the grain sector.

After Early Dip, Treasury Buying Spree Develops

Good liquidity, nice smooth moves this morning. Despite fresh data this morning showing inflation ramping higher, the affect on treasury yields was very short-term. The market simply shrugged off the inflation concerns, and treasury buying resumed with renewed vigor. With the weak economy, the Fed and the market seem to expect inflation to gradually moderate. This is a good day for buying treasuries!

Grains Grind Lower

Good weather is the news of the day today. High temperatures are expected to moderate within the next few days, increasing the likelihood of good crop yields. That contributes to lower prices. All the grains were moderately lower overnight.

27 Year Inflation High

Stocks this morning dropped at the open, partly due to the highest inflation in 27 years. All those stimulus checks sent out over the past two months have been eaten up in the form of inflation and higher expenses. There wasn't much left to stimulate the economy.

Jaw-Dropping Editorial on Investor's Business Daily

I thought I knew quite a bit about Democratic Presidential candidate Senator Barack Obama, until I read this article from Investor's Buisness Daily. I was well aware of false ideas about Sen. Obama spread by opponents, but the article below is nothing I had known. I would suggest that every American should read this!

Particularly noteworthy are the parts about Senator Obama's mentorship by Frank Marshall Davis, as mentioned by Sen. Obama in his previous book, Obama's father's philosophies and writings, and Sen. Obama's close connections to the Luo tribe in Africa. Wow!

IBDEditorials

Edouard Pushes Crude Prices Higher

Tropical Storm Edouard is the first storm of this year's hurricane season to seriously threaten oil platforms in the coastal Gulf region of the United States. Fortunately, Edouard is still just a tropical storm, but its proximity to the region and potential to strengthen into a hurricane is putting a floor under crude oil prices for the time being. With the storm already so close to making landfall, it's hard for me to imagine a scenario that could create much risk. Crude oil tonight is trading approximately $1 higher than Friday's closing prices. Click on the image to see the most current map of the storm on the accuweather.com website.

Is it a Bear?

The bull trend in corn didn't last long. Now, it shows some of the markings of becoming a bear, riding a wave of weather that suggests increased corn yields, and thus, lower prices. The volume on the daily chart is still pointed higher, but prices are pointed lower. Conflict usually means consolidation and range trading. The left chart shows this evening's trading on the tick charts, and the right side shows what may be the emergence of a new bear in corn prices on the daily chart. Note also that the Bollinger Bands on the daily chart are more suggestive of a consolidation than a new bear trend, since volatility is falling rapidly.

Personally, I don't expect prices to decline too much. Commercials are already beginning to buy up corn at what they see as bargain prices. I would be surprised if the price of corn drops outside of the recent trading range. But who knows? Anything can happen!

Three More Currency Trends

Here are three more downtrends. This time they represent reversals of sentiment in three of the worlds strongest currencies. Two, the Australian Dollar and the Canadian Dollar, are tied to the downtrends in commodity prices in recent weeks. The Aussie and the Loonie, as the two are known among Forex traders, are known as "commodity" currencies for this reason. The Loonie also seems to be hit by its close relationship to the U.S. economy, according to a Bloomberg article this evening. Note in the charts the engulfing patterns on the Loonie and Kiwi charts.

The third one, the New Zealand Dollar, has had the highest interest rates among the developed nations of the world, but economic weakness has forced the Central Bank of New Zealand to recently begin lowering interest rates for the first time in several years, and the Kiwi's strength has begun to wane as a result.

One reason why I am always scanning the financial markets for existing trends is that once I find one, one of the easiest ways for make money in futures is to find an existing trend and then position myself to enter that trend. One must first find a trend, before one can trade it. Lately, I have set a goal for myself to scan more broadly to locate trends, so that I can ride those trends like a surfer rides a wave. Here was a post from a few weeks ago on the subject:

Don't Just Trade With the Trend. Find It!

Australian Dollar (Aussie)

Canadian Dollar (Loonie)

New Zealand Dollar (Kiwi)

Two Solid, Overlooked Trends

Here are charts for two trends that I have overlooked and missed. Both caught me by surprise, but the second one especially. For many years, the Mexican Peso was considered to be a weak currency. Not any more!

South African Rand
Mexican Peso

Bank Failures Continue

The FDIC has shut down another bank, this time a small one in Florida.

Happy Birthday to You!

One year has now passed since the subprime mortgage blow-up and the credit crisis began. I can't help but wonder if the government hadn't intervened, and intervened again, and again, and again, would things have been different? No one knows, including me. However, since the average recession lasts about 9-10 months, might we have had a recession that would now be over without all the delaying interventions of the government? Might we have avoided the collapse of the US Dollar, and the commodity inflation that has caused so much economic turmoil? Only history will know. But we'll always wonder, won't we?

In any case, Happy Birthday to you!

Corn and Soybean Prices Crushed

Wow! Corn and soybean prices have dissolved this morning. This is the largest move in the grains within the past week.

Tough Talk and Crude Oil Shoots Skyward

The Israelis are making it known once again today that they will not tolerate Iran to produce nuclear weapons. They are also providing some evidence that Iran is getting very close to achieving that objective. Crude oil is reaching new price highs at $128.60/barrel for the past week, more than $8 above recent lows.

Last Minute Freefall to End July

What an unbelievable way to end the moth of July, with a stock market freefall into the closing minutes of the trading session today. The bulls and bear battled back and forth all day today (left chart). I was long twice and short three times during the course of just one trading session. But at the end of the day, the bears took their blood today. Whew! The Dow was down over 200 points in the closing moments of the day.

Be prepared for a very volatile day tomorrow, with the jobs report setting the tone for the trading day.

Stock Futures Have a Permabull Bias

Today, as I anticipated in my previous post, stock index futures are rebounding stoutly after rather severely gloomy economic GDP and jobless claims data. If there was any good news today, it was that the news was all in the distant past. I always expect this with stock index futures. I wouldn't be at all surprised if stock futures end up higher today, despite the ornery news.

The only current news today -- unemployment claims -- was even worse than the GDP data, but it is completely overshadowed by the GDP data. I suspect the GDP will be discounted by traders in the market. "Oh, that's old news. Things are better now," they'll say. Things are not better now, if unemployment claims are rising and accelerating. Understanding this psychology is helpful, because it allows traders to take advantage of this over-ebullient sentiment and fade the market at the right time.

Personally, I think this is evidence that the market is not always right. It is evidence that the market may be influenced -- shocked -- in the opposite direction when additional news in the futures continues in a dismal and dour direction. The rubber band will eventually snap back in the other direction. The fact that these shocks occur and that prices reverse suddenly is evidence that the market was dead wrong about the state of the economic prospects. They then think, "Oops! I was wrong. I'd better change directions!" Shocks occur in the market when participants learn en mass that the market was wrong. It was moving in the wrong direction. However, my opinion doesn't really matter. All that matters is what the market does. Price action always trumps my opinion. I am genuinely and blissfully irrelevant!

This is one reason why I try to nullify my own biases. I don't try to predict the future of market prices. I try instead to respond to the market. Predicting the markets creates bias that blinds me to what market forces are telling me. That's why I'm content to be blissfully irrelevant. It's more profitable!

One of the fascinating aspects of the stock index futures is that they always tend to want to go higher. They are strongly biased to move higher. Personally, I don't care what direction the market moves, whether up or down. Unlike the stocks themselves, I can take either a long or a short position in the futures markets, and it doesn't make any difference which. The stock market requires me to "sell short" the market, and then exit by covering those shorts. There are different effects and ramifications which I won't delve into here. But with the futures markets, buying or selling is treated equally. I buy to go long, and I sell to exit. I sell to go short, and I buy to exit. Easy! Simple! With stocks, it is somewhat different. Again, I am not going to be more detailed than to say that it is different.

Stock price inflation is welcomed and encouraged by our government and society. So is housing inflation. Commodity price inflation isn't. All government interventions within the past year have been designed to create stock and housing price inflation, and to cut off commodity price inflation at the knees.

This bias towards higher stock prices is a fact of the markets. Knowing this fact empowers traders to take advantage of this wonderment and profit from it.

But since I have an inquisitive nature, I want to know why this phenomenon exists. Why do stock markets always have a bias toward moving higher? There may be several reasons why this circumstance exists. I am ruminating on what some of those might be. But I don't have time to ruminate in writing, at least not right now. I'm too busy trading. I'm too busy making a living.

Ripple Effects of Today's Disappointing Economic Data

The ripple effects of today's disappointing economic data can't be underestimated. However, since this unimpressive data is contrary to the more upbeat markets of the past few days, perhaps it will be short-lived. News that shocks the market contrary to the current trend tends to last only a few days, and often just a few hours. Of course, a disappointing jobs report tomorrow could reverse the more cheery sentiments of the past few days. Only the future knows the futures!

So far here are the ripple effects:

Gold -- sharply higher
US Dollar -- solidly down
Foreign Currencies -- mostly higher
Crude Oil -- Rising Strongly (weaker USD)
Grains -- market not yet open, but likely to open higher on weak USD
Stock Markets -- Down, but I wouldn't be surprised to see a rebound

GDP Revised to Negative in Q4 '07, Disappoint in Q2 '08

The stock market futures dropped this morning following the release of GDP data by the U.S. government. It indicated that GDP for Q4 '07 was negative instead of the previously-reported positive data. This is significant, because the most common definition of a recession is two consecutive quarters of negative GDP. This is devastating news to those who have been claiming throughout 2008 that the U.S. was not in recession because we hadn't seen any quarters of negative GDP. These optimistic souls have had the rug pulled out from under them today.

GDP data for Q2 '08 also disappointed. This is particularly disappointing when we take into account that the stimulus checks were sent out in Q2. Without those, GDP would very likely have been negative. It was superficially positive, however. I say "superficially" because when inflation is taken into account, it is also negative. The government's calculation method doesn't take inflation into account.

Jobless claims are also very troubling today.

I would like to comment more, but it's time to trade, not talk.

More on Speculation in Commodity Markets

I just posted the following response on another blog:

I would expect nothing more from a liberal. Blind ideology. No facts, no data, no empirical evidence. Just pure opinion stated as if it were a fact. Just quoting testimony before Congress doesn’t mean that the testimony is factual. You conveniently omit all the contrary testimony in a selectively opinionated manner.

Often, the “blame-the-speculators” crowd will cite the existence of large funds as a priori proof that they cause prices to increase. This is like saying that because one sleeps in the garage, one must therefore be a car. WRONG! The fact is that coincidence is NOT causality.

All the data, all the facts, and all the empirical evidence suggest that speculators are not the cause of high energy prices.

No credible analysis suggests that China and India are the SOLE causes for the rise in crude oil. There are numerous reasons, all of which together represent not just one or two, or even three or four, variables contributing to higher fuel prices. They are a perfect storm that almost guarantee high prices for energy.

Only two sources have factual data — the CFTC and the futures exchanges. Both have repeatedly released the data that indicate that speculators have not been the cause of high fuel prices. They have repeatedly used the facts and the data to disprove the OPINION of Mark Cooper of the CFA who you quoted. Why did you not quote THEM? They have the data! Why do you ignore the facts and the data? We both know it is because the facts don’t support your opinion.

During the past year, speculators have been reducing their size and positions in the market, while prices have skyrocketed. The commercials, who take physical delivery and use the oil in their products, have increased their presence. That’s the fact, and it doesn’t support the opinion that speculators cause high prices.

Speculators are outnumbered by a factor of 5:1 by commercials in the crude oil markets. Of those 20% who are speculators, the CFTC and exchange data indicate that at any given time, about half the speculators are short. Thus, the speculators who are long represent only about 10% of the market. Hard to manipulate the market with such a small position, isn’t it? But that’s the fact.

The fact is that the futures markets are already amazingly transparent, despite OPINIONS that they aren’t. All companies in the market of a certain size or larger must already file various reports, making their size and positions in the market very clear. This data is gathered and published weekly by the CFTC. That’s the fact.

There are more facts, but somehow, regardless of the facts, I suspect that those who ignore those facts won’t really care that the facts and the data don’t support their OPINION.

The fact is that one of the variables, in addition to the China/India factor, is the blunt coercive banning by a liberal-controlled U.S. Congress, of additional domestic production of increased capacity in the U.S. Government policy is a factor that, unlike speculators, IS contributing to higher oil prices. It is not coincidental that over the past two years, during which time such policies have been amplified, crude oil prices have risen, while domestic oil production continues to fall.

It is also a fact, as stated by a few shameful but honest liberal policy-makers, that one of their methodologies for imposing their Global Warming Inquisition, is to block additional production with the intent that it will drive prices higher and speed the transition to renewable forms of energy production. That’s a fact. This is a blunt, coercive, and sickeningly shameless was to control the American people.

The fact is that another variable — gross and unbridled overspending supported with Kenesian economics and bloated M3 money supply creation — is devaluing the U.S. Dollar and inflating the price of crude oil and other commodities. When those commodities are priced in the world markets in Dollars, and those Dollars are being devalued by devastating monetary policy, prices will continue to go higher. They HAVE to! It simply takes more Dollars to buy the same quantity of oil. Both Republicans and Democrats in Washington are equally responsible for this contributing factor to higher prices."We're all Keynesians now," Nixon said. Sure enough!

The fact is that this year, Congress has mandated that 1/4 of all corn production in the United States MUST be used in ethanol production. When 1/4 of the largest agricultural crop in the world is diverted into one use by congressional fiat, it has far-reaching ripple effects. For example, as farmers convert more and more acreage to corn production because of the higher prices, less acreage can be used for production of wheat, tomatoes, potatoes, and all other agricultural food products. That causes food inflation, not just corn inflation. That’s the fact!

These three causational factors, interestingly enough, were created by Congress. Congress is perhaps the single largest causational factor in creating higher oil prices. But since when does a politician take responsibility for inflation — or anything else, for that matter? (Obama can't seem to bring himself to admit he was wrong about anything, including the surge in Iraq. Obama speaks with silver tongue -- and it's forked in the middle. I was wrong about the surge in Iraq. I was opposed to it. I was wrong.) Thus, they point the finger of blame elsewhere, because they know that THEY and their policies are the true causes. By distracting the finger of blame from themselves, they protect what they really want — POWER. They are more interested in power and party, than in helping the American people become energy self-reliant.

I could go on and on, but frankly, it’s time to trade. Time to make a living.

The fact is that blaming speculators will not add one barrel of oil to global production. It WILL add to prices!

Crude Oil Rises More Than $5

I guess the vacation from high crude oil prices is over. Thanks, Congress!

One (or Two) Picture(s) Worth 1000 Words

Need I say more?

Crude Oil
Stocks

Crude Oil Rallies Today

The EIA report this morning was bullish for crude oil today. Now that prices have fallen, traders are worried that slackening demand will increase again as gasoline falls below $4 at the pump, and crude oil prices are somewhat higher today as a result. This was undoubtedly the great factor in the downside breakout in the stock indexes, too.

Downside Breakout From Triangle

There it is. The breakout was downward!

Triangle Sets Up for Breakout

This chart pattern shows a setup for a breakout soon in stocks. Note the triangle pattern on both the 15 and 3 minute charts. While the upward momentum of the past few days would suggest a great likelihood of an upside break-out, the strong downward volume on the 15 minute chart (red line, bottom panel, left chart) suggests weakening price momentum. That's very strong volume pressure downward! The fact that the daily chart is in consolidation, crude oil is higher today, and prices are close to the upper Bollinger Band on the daily charts are also factors suggesting an eventual break to the downside. We'll be ready when it happens!

Surprise! Housing Bill Expands Government Power!

I have been reading somewhat this week regarding the housing bill that Congress passed last weekend, and that President Bush changed his mind and agreed to sign. Did you know that it expands the power of government to use Federal funds and eminent domain to take the property of private landowners, including homeowners? Surprise!

In addition, the new housing bill also expands the power of the Federal government to monitor your online activity, including purchases and credit card activity. Surprise again!

So what does a housing bail-out have to do with monitoring your internet activity?

Good question!

Good ADP Sends Stock Futures Higher

A surprisingly good ADP employment report this morning has sent the stock futures leaping higher. More good news, which may fuel today's trading activity!

Fed: "Fragile Circumstances" Require Rescue #3 This Week

The Fed this morning has decided to continue to extend the length of the "temporary" emergency lending facilities into next year. The facilities that were originally planned for only 28 days have now been extended not only beyond 28 days, they have now been extended for at least the next six months! They have also begun a new additional rescue vehicle, unheard of before, and extended and expanded the swap facilities with the European Central Bank. I guess this means that the Fed sees the crisis continuing at least into next year. With the additional powers that the Congress seems determined to give the Fed, the creature from Jekyll Island is rapidly growing into the monster from Jekyll Island.

I always try to look between the lines when events like this occur. Many investors react only to the headline, and the stock index futures are trading sharply higher as a result. However, that reaction is very short-term, lasting literally no more than a few days, and most of the time, just a few hours. I like to ask myself what prompted this action by the Fed. What does the Fed see that makes this action necessary? If circumstances were good, then such Fed actions wouldn't be needed. But in this case, the Fed has explicitly stated that economic circumstances as "fragile". I'll take them at their word.

"It's a Bull!"

Isn't he cute? Corn and soybean prices are showing more and more price strength. This is remarkable given the powerful recent downtrend that was reinforced in crude oil and other commodities today. Grains are bucking the commodity downtrend for the past few days, so there must be good reasons for it. On a day when crude oil gave up about $4/barrel, the Dollar was the strongest we've seen in a month, and other commodities gave up ground, grain prices moved broadly higher!

Will this bull grow and strengthen? Or will it flatten into a consolidation and range trade? I don't know! But I'm trading this bull for all its worth!

On the left is tonight's tick chart, which is trading sideways to higher for the last 3 days. On the right is the daily chart, showing growing volume to push prices higher. The August 12th USDA report will decide the trend for grains for the rest of the harvest season, but hot Midwest weather is beginning to show signs of trouble for crop yields.

Candlestick Patterns -- Powerful Tools of Sentiment

This chart shows a chart pattern that uses Japanese Candlesticks. These "smart" little time interval depictions can provide very helpful information regarding the direction of the markets. There are various websites across the Internet that provide very good instruction on the use of candlesticks as indicators.
This chart shows one known as a bullish engulfing pattern. When a candle reverses such that the body of the new candle completely encompasses the price range of the previous candle that was moving in the opposite direction, then it is considered to be a sign of a reversal. In this chart, the long green maribozu candle at the right of the encircled area has a price range that completely encompasses the prior red candle. If the new candle "engulfs" more than the previous candle, then the force and validity of that reversal is enhanced. In this case, the green candle engulfs not only the previous red candle, but the previous seven red candles. The resulting bullish reversal is proof of the power of this pattern.

The engulfing pattern is a very strong sign of a significant reversal in the opposite direction. Often, a candlestick pattern on one time frame (this one is 3 minutes) will be matched with another candlestick pattern on another time frame (perhaps a 15 minute chart), thus reinforcing the reversal sign. Traders would be wise to learn and use candlestick patterns, because they are a powerful tool in the arsenal for recognizing short-term market sentiment, especially reversals. They can help us make more money by identifying early reversals, and they can save us money by protecting us from reversals against our positions.

I printed various japanese candletick patterns from various websites and put them in a binder, which I study regularly to sharpen my acuity to recognition of these patterns.

Remember the Rout on Rice?

I'll bet most people don't know about the rice rout because the news media hasn't reported it. However, perhaps you remember this past Spring when the cost of rice rocketed to unprecedented heights, and prices reached more than $22.75 per bushel. Have you ever wondered what happened to the grain that seemed to be made of gold?

It is now selling for only about $16.50 per bushel! That's a 27% drop in price, and it's still falling! (Note also in this chart the "spike", as I mentioned earlier today is typical for physical commodity tops.) Funny, isn't it, that the news media doesn't mention this now! Why happened to the news stories about the rice rout?

Commodity Downtrend Continues, But Congress Still in Stupor

While the U.S. Congress is obsessed with blaming speculators for the recent price spikes in commodities, the reality is that commodities are in a significant downtrend. The train left the station weeks ago, and Congress is behind the curve as usual. They have been left in the dust. Ironically, I find it to be the paragon of egotism that Congressional leaders are trying to take credit for lower prices in commodities. Senate Majority Leader Reid tries to blame speculators for the high prices, while simultaneously trying to take credit when prices fall by claiming that it was the threat of action against them that spooked them and brought prices off their highs. If speculators caused the run-up in prices, then shouldn't they also be given at least some credit for the price collapse? These ego-driven political madmen try to blame others for inflation, while taking credit to themselves for price deflation. What absolute idiocy! The truth is just the opposite!

It was their policies that devalued the Dollar, their policies that banned domestic energy production, their policies that created food-to-fuel mandates that drove food commodities higher, etc. It was Congressman Reid's (and his cohorts') policies that created the inflationary mushroom cloud. It was the high prices themselves that have eroded demand so severely that Americans are being forced to cut back on driving -- and even eating -- so much that prices have now declined. Of course, a few of Senator's Reid's friends have admitted, in a few moments of shocking and shameful honesty, that this was their strategy for controlling prices all along. They admittedly wanted high prices to force painful prices on Americans so they would cut back. Americans, abandoned by their elected representatives, have brought down prices by cutting their consumption of all sorts of food and energy commodities. Americans have brought down the demand side of the equation through sheer pain, but without the help of their own Congress.

These guys are close cousins of Hugo Chavez, and don't even know it. Perhaps it's the in-breeding that makes such egotism so pervasive. Permanent brain damage seems to be one result. The saddest thing about all this is that the downtrend will be only temporary because Congress is doing nothing about the supply side of the equation. The inflationary and destructive policies remain in place! Thus, because the supply remains in dubious question, prices will inevitably spike much higher again in the not-too-distant future. This price respite will only be temporary unless Congress wakes up! Congress remains asleep at the switch despite the fact that the train left the station long ago. They were too blinded by their lust for power and party loyalties to bother hopping on at the station.

This daily chart for the Rogers International Commodity Index futures is one of the more liquid broad-spectrum commodity indexes, and the trend is still very clearly down. I don't day trade this one, but it is very liquid and excellent for trading over the longer-term on the daily charts. It's noteworthy that today, we have breached the price support level established with the lows of May and early June. With the gap downward and the two candles on July 8th and 9th, traders were making a quick exit as prices then spiked upward one last time to touch the upper Bollinger Band on July 11th. It was straight down from there!

Bowl Bottoms, Spike Tops

Physical commodities are known for an interesting phenomenon that I refer to as "bowl bottoms, spike tops". I believe I may have learned of this concept from Chick Goslin's book, "Trading Day By Day". This phenomenon occurs particularly with physical commodities because as prices rise in a parabolic way, eventually high prices destroy demand, following which prices tend to plunge rapidly downward. Thus, this is called a "spike top". On the other hand, when prices are in a downtrend, they tend to slowly lose momentum and gradually bottom out as demand begins to slowly and steadily build until prices begin to drive higher once again.

Wheat example #1
Wheat example #2

Dollar Shines

It's hard to believe that over the weekend, the US Dollar was being badly beaten, and today, the Dollar is rocketing to its highest level in a month. The Dollar is also benefiting from the downward pressure on the price of crude oil today. This is a good day for improving overall market sentiment.

Condolidating and Indecisive

This daily chart for the S&P 500 Index futures appears to be showing signs of settling in to a range trading phase. Day trading will be the order of the day until a new break-out occurs. There appears to be fairly strong support at the 1200 level for the S&P 500 also. Treasuries also appear to be consolidating into a tight range. It's possible that this sideways trading may be in anticipation of GDP and payroll announcements later this week. Perhaps one of them will stimulate a larger break-out.

Crude OIl, Consumer Confidence Fuel Stock Rally

What a nice surprise today. Both a collapse in the price of crude to reach new lows, coupled with a surprising rise in consumer confidence, have lifted the stock indexes with a very nice rally today. It seems that lately, receiving two adrenaline shots of good news on the same day, has been very rare. We should take advantage of it. Nice rally today!

Consumer Confidence will probably only have a short-term impact. However, continued demand decay for crude oil could have a more lasting and beneficial influence on stocks.

Stock Rally
Crude Collapse

Dow Dips 239 Points

Government Bail-Out Du Jour

Treasury Secretary Paulson just finished a press conference in which he unveiled yet another attempt by government to stabilize the housing market. This chart shows the initial reaction to buy the Dow (see the circle in the left chart). This one only lasted a few minutes, surprising even to me. The positive reaction in the stock market was short-lived, and the stock market indexes have once again sold off, where they are currently down about 200 points on the Dow thus far today.

Next U.S. President Faces $500 Billion Budget Deficit

What an inauguration gift! By the time the next U.S. president takes office, he will be facing nearly a $500 billion budget shortfall. That's 1/2 trillion Dollars -- for a single year! What a staggering amount! (Lest anyone accuse me of overstating the official amount of $490 billion, I would remind them that this amount does not include the supplemental amount for the War in Iraq.) The American people have a very jolting wake-up call coming. Eventually, the credit card must reach its credit limit. Much of it may come in the form of inflation as their currency collapses and the Fed responds with ever greater amounts of fiat money, either via printing press or treasury notes (debt). They're all Keynesians now!

Here is the Bloomberg story today:

U.S. Deficit to Reach $490 Billion in 2009

Sometimes I wonder about the sanity of anyone who would want to be the President of the United States at this moment in time. It must be the power they want! No sane person would want the crushing responsibility or the comparatively paltry salary to goes with it! It seems to me that anyone that would seek the office must, by a priori evidence, be considered unbalanced, insane, and therefore unfit for the office. Wouldn't you just have to crazy to want the office?

The Founders established the electoral college, which has been corrupted by the two political parties, so that a person could be recruited for the office who might otherwise have never sought for it. They envisioned an electoral process in which some of the best people in the country would recruit the person who would best serve the people, rather than the one with the fattest coffers or the biggest mouth. This is how George Washington was selected as the first U.S. President. He was never a member of a political party. He despised them. He even warned about political parties in his farewell address to the nation. He had the foresight to know how desctructive they would prove to be. You would have thought he wrote the speech yesterday.

You can read it on the Yale Law School website here:

Washington's Farewell Address

This speech is not light reading. Like the other Founding Fathers, George Washington was a highly educated man, with an intellect unmatched by nearly any other mind in human history (except his contemporary Founders, who were universally some of the greatest minds and most noble of characters ever known amongst humankind).

Grains Turn Negative

This is the chart that genuinely surprises me today. Grain trading is mixed this morning, with wheat having sold off significantly, soybeans relatively flat (having sold off of overnight trading levels), and corn slightly higher. However, this chart is the composite of the three grains combined with sugar, and it shows significant selling activity this morning. This chart is for the DBA ETF. The large spike at the start represents overnight price activity before the stock exchanges opened this morning. This sell-off is surprising to me, especially considering that crude oil has risen significantly today. Corn, soybeans and sugar are considered to be biofuels, so they tend to track the price of crude oil somewhat. Not today! This sell-off is occurring despite some of the best grains analysts in the business having forecasted higher grain prices across the board today. The futures markets never cease to catch me by surprise.

Stocks: Straight Down

Only a stock short is seeing green on this chart today. While this surprises me somewhat, given some of the good earnings reports out today, I'm not surprised that this appears to be the verdict of millions of investors across the world on the U.S. government's latest bail-out effort. Or perhaps this is more a reflection of the rise in crude oil prices today.

I am also surprised that treasury futures, which represent U.S. government debt, haven't sold off. They are still being used as a safe haven for times when stocks don't seem safe at all.

Eventually, when the debt burden becomes so onerous that the financial markets lose confidence in the capacity of the U.S. government to pay its obligations, then global investors will begin to dump treasuries, and the U.S. Dollar will become a pariah currency. I don't expect that to happen suddenly, or quickly, but certainly eventually. Profligacy eventually receives its just desserts.

Dollar Drubbing

The US Dollar is taking a bit of a beating tonight in active Asian trading. Here are the Euro, Yen and Australian Dollar (Aussie) in overnight trading, all rising steadily against the US Dollar. One certainly must wonder if the Dollar's dip is due to market reaction to the huge bail-out engineered over the weekend by the U.S. Congress. More crippling debt doesn't inspire much confidence in the greenback, or the capability of the U.S. economy to manage the debt burden that is growing exponentially. This should send a message to the Congress, but chances are, they won't listen.

Euro
Yen
Aussie

Evening Trading Phenomenon

Until tonight, I had never previously noticed this phenomenon. I only noticed it because of the existence of tick charts. Time interval charts would never have revealed this occurence. Of all the various futures, including treasuries, stock indexes, crude oil, gold, and grains, the most actively-traded futures during the evening hours are the grain futures. Yes!

Look at the tick chart shown on my last post. While the charts printed fully across the entire screen on the grain charts, the tick charts for treasuries and stocks, crude oil and gold, only printed about 3-5 candles. While the grains printed enough trading activity to print 40-50 candles, even the highly-liquid S&P 500 and treasury futures printed only 4 candles during the same period. Wow! Interesting!

Grains Consolidating for New Thrust to Higher Prices?

Over the past few days, after significant downward price pressure and a downtrend for the past several weeks in the grains complex, technical signs are building that prices are consolidating and commercial hedgers are using the price collapse to buy at bargain prices. Corn, soybeans, and wheat, after moving higher on Friday, are also up significantly in Sunday evening trading as well. Heat stress on the plants due to hot weather is being attributed.

It certainly appears that the downtrend in grains is over. Higher prices are probably forthcoming, and unless the August USDA crop report nest week shows that crop yields have unexpectedly increased, then we have likely already seen the lowest grain prices for the year. Corn declined more than 29% from its high June 27th. Imagine that! A decline of nearly 30% didn't even gain mention in the news media headlines! The daily chart for soybeans is shown below. The chart for wheat has already begun a new uptrend.

Dow Drops in Early Evening Trading

Stock market indexes, in early Sunday evening trading, have dipped lower. The Dow is down 30 points, which isn't huge, but is surprising for early Sunday evening trading.

Is this what we should expect following the latest bail-out from Washington? Now that the government has unlimited taxpayer funds to buy shares of Fannie and Freddie, under Treasury Secretary Paulson's plan, shouldn't we have expected the opposite from investors when the futures markets reopened Sunday evening? Is there something we should learn from this, that global investors are getting early jitters from the latest government rescue plan? What kind of new precedent it this, when the government is authorized to spend unlimited amounts of cash from the Federal Treasury to buy the stock of private corporations that have gone astray? Has anyone other than me lost count how many bail-outs and rescues we've seen since the credit crunch began one year ago? They seem to be coming more quickly and more frequently with every week that passes, don't they? The Founders must be crying in their graves for the Republic that they created!

Idea: If I owned shares of Fannie and Freddie, I would use this as my chance to use the government's unlimited buying power to dump my shares at an artificially-elevated price. Every time the Treasury buys shares of the two, once prices started to drop again, I'd be selling for every penny I could get. After all, the elected representatives of the people have decided to place this market risk onto the backs of hard-working Americans, so why not let them accept that risk?

Who knows? I might even use the government's intervention to drive the share prices of Fannie and Freddie higher as a way to ride an uptrend in the prices, dumping them once the prices start to consolidate or collapse. A few days ago, I mentioned that it is the job of a trader to find a trend, and then ride that trend in whichever direction it goes. Why not ride the trend of unlimited funds to drive share prices higher for these two stocks?