Stock Sizzle Turns to Stock Fizzle

The bulls need to step things up soon, or sentiment could turn negative in a hurry. This would be a terrible shock to see the most bullish news this week turn into a rout instead.

Corn Sales Down, Prices Follow, As Do Other Grains

The USDA has reported that corn sales for the new crop year (started Sept. 1) are well behind last year, causing grain prices to open down today. U.S. corn sales are 700 million bushels behind the 2008 crop year pace after just three months. The stronger U.S. Dollar is also suppressing prices.

Despite that wheat opened lower also, there is growing concern of damage to the winter wheat crop in the ground. Lack of snow cover and icy temperatures threaten to damage the crop. Snow cover helps to protect the tiny seedlings because it insulates them from the coldest temperatures.

Oil Dips Below $34 on Expiring January Contract

Interestingly, however, the February contract is still priced much higher, as traders are anticipating much higher crude oil prices to come.

S&P Downgrades Debt Ratings on Largest Financial Institutions

Standard and Poors has now dowgraded the debt on 11 major financial instutitions, including Bank of America, Deutsche Bank, JP Morgan, Morgan Stanley, Wells Fargo, and Goldman Sachs. And to think that JP Morgan, Bank of America, and Wells Fargo were touted as the strong ones that could rescue some of the others! Ouch!

Even more bad (debt) news. Jumbo prime loan instruments are also now being downgraded too as default rates are rising rapidly. This is ominously frightening in that it portends the likelihood of a flood of new mortgage defaults and foreclosures on the homes of America's wealthy borrowers.

Click here for the full story from Reuters.

Oh What a Relief Rally... It Is!

Stocks rallied upon the revelation of the details of the auto company bailout revealed this morning by President Bush. Unfortunately, the terms of the loan can be changed at any time, so Mr. Bush is merely passing the baton in a relay race. This creates even more uncertainty about the future than the bailout that Congress was negotiating. Is that perhaps why the rally is starting to fizzle already, just 15 minutes after the news is announced?

Auto Bailout: $13.4 Billion Sticker Shock

From Politico.com:

"President Bush is announcing a $17.4 billion bailout for auto manufacturers, with the loans contingent on the firms proving that they can become "viable" ongoing firms. Of the total, $13.4 billion will be paid out in December and January. The last $4 billion is contingent on the second installment of the Wall Street bailout funds from Congress."

Here is the full story.

GE's Investment Grade Bond Rating at Risk

Standard and Poors has downgraded the debt rating of General Electric. It has now rated the likelihood of GE's debt being downgrade to below investment grade at 30%.

Here We Go Again! BOJ Threatens Interventions!

The largest trading loss I ever took occurred about 4 years ago when the Bank of Japan intervened in the currency markets just after I took a trade. I sold the USDJPY currency pair with several lots shortly before the Bank of Japan intervened to suppress the Yen to protect exports. I not only got clobbered, I added to my position and held onto it until the losses became so great that I could no longer endure the pain.

Here we go again! The Bank of Japan has now begun engaging in verbal interventions in the currency markets because the Yen has been rising steadily for several weeks. Now, with the Dollar falling following the Fed's interest rate cut to 0%, the Yen is rising even against the Dollar. Eventually, once the verbal interventions are no longer effective, the Bank of Japan will once again intervene with huge injections of trillions of Yen to push the price of the Yen downward.

Credit Suisse Predicts 4X More Foreclosures

From Bloomberg tonight:

"Over the next four years, 8.1 million U.S. mortgages will enter foreclosure as the recession worsens and home prices continue to fall, Credit Suisse said in a Dec. 4 report. Banks, insurers and mortgage companies have recorded about $1 trillion of losses worldwide since the start of the global credit crunch in 2007."

This is a staggering figure considering that so far, about 2 million homes in America have entered foreclosure! Folks, we are just getting started!

But it gets worse! From the same article:

"Almost 53 percent of borrowers whose loans were modified in the first quarter were more than 30 days overdue by the third quarter, John Dugan, head of the Treasury Department’s Office of the Comptroller of the Currency, said last week at the National Housing Conference in Washington."

This article is telling us that all those loan modifications don't work! Once the ink is dry on them, people default on their loans again and their homes go back into the foreclosure process a second time!

Click here for the full story.

Wheat: Yes, They Call This An Uptrend

Wheat has been moving solidly higher for two weeks now, primarily because weather conditions for winter wheat are not good. Concerns for winterkill are rising, and with it, so are prices. Also, Argentina has cut its wheat forecast.

Stock Market Free Fall Means the Bears Won Today

We have now wiped out the entire Fed rally from Tuesday!

Strong Forces Battling in Stock Markets

After the 359-point rally of the Dow following the Fed's announcement two days ago, a few forces appear to be in a deadly battle for the foreseeable destiny of the stock market. Prices closed convincingly higher than the 50-day moving average on Tuesday, which is highly significant, especially for longer-term traders. Prices have also remained above the 50-day moving average since then. This is quite bullish!

On the other hand, prices have shown no follow-through to move higher over the past two succeeding days. Today's pattern looks like radio static, and is nearly impossible to trade with any consistent success. We may also see a new round of hedge fund redemptions within the next few weeks, as investors try to cash out. We have yet to see a genuine sense of capitulation in the stock markets, despite all the bloodshed. There still remains an amazingly resilient and optimistic set of investors that haven't seen the need to "get liquid" and move to cash yet. Additionally, bond traders are seeming to predict a depression, and these guys have one of the most accurate track records in a historical sense. This is quite bearish!

Thus, we see a classic bull/bear battle playing out in the stock market index futures. This typically results in a consolidation pattern. Add to that the fact that volume is weak during the Christmas Holiday season, and we could see some very interesting patterns over the several days, probably lasting until the new year, when volume levels, along with many traders, will return to the markets.

EUR/USD Currencies: Too Far, Too Fast

After the plunge in the value of the Dollar over the past few days, I have begun to think that the Dollar had fallen too far, too fast. Likewise, the Euro had climbed against the greenback too far, too fast.

This wasn't surprising, given the shock delivered by the Federal Reserve on Tuesday. Even with the Federal Reserve's notice that it was reducing rates to 0%, and its new strategy of quantitative easing, the Euro had been rising rapidly (Dollar falling rapidly) for at least a week before the Fed's shock. By looking at the daily chart of the Euro (not shown, this chart shown here is the intraday for today), I couldn't help but notice that even the opening prices occurred outside the Bollinger Bands. That phenomenon can be easily seen on my previous posts of the Euro and Dollar over the past few days. That means that prices were printing at three to four standard deviations outside the norm. The statsitical probabilities of that occurring, much less being sustained at that pace, are astronomically and statistically small. Interestingly, today's retracement, as shown on the daily chart, is a relatively small one.

Needless to say, that is a parabolic price move by any standard or measurement. It is unsustainable for more than a few days. With such a rapid and powerful movement, we are more likely to see a Cahen bubble pattern rather than a long, sustained set of parallels (see earlier posts explaining the two, or Cahen's book). Thus, as I was reviewing my charts last night and noticing such extreme price movements, I began expecting either a regression to the mean (reversal) or a consolidation for a few days until the bands -- and market sentiment -- can catch up. We may then see another strong movement higher (for this chart, the Euro).

Does that mean the Dollar downtrend/Euro uptrend is over? Not necessarily, but we certainly need to take a breather for a few days, at the very least. After such a monstrous move in the currency markets so quickly, a consolidation period is not only warranted, it is expected. In fact, the more extreme a movement is, the more likely the market is to reverse rather than merely consolidate. We'll know which it will be within a few days. My bias is for further downside to the Dollar, but now that I have acknowledged my bias, I will try to ignore it in trading.

I have noticed also that after such a forceful and fast movement, there are often unintended consequences, or perhaps better said, unexpected effects, that follow within a few days. These unexpected effects tend to amplify the original movement. Forces are set in motion that become almost unstoppable, and we never know what those forces will be or what they will unleash! Sometimes those forces take a few days to creep through the financial system and take effect. Hence, my bias for a deeper Dollar plunge. But no one really knows. Anything can happen in the financial markets.

Obama Increases Size of Proposed Stimulus Plan

From Bloomberg:

"Barack Obama may ask Congress next year to approve a stimulus plan of around $850 billion, an amount that has grown as the U.S. economy sinks deeper into recession, an adviser to the president-elect said."

Crude Oil Dips Below $40

From Breitbart.com:

Oil prices tumbled below $40 for the first time since the summer of 2004 Wednesday despite an announcement from OPEC of a record production cut of 2.2 million barrels a day...
"There's just so much oil in inventory out there right now," said Michael Lynch, president of Strategic Energy & Economic Research. "Nobody wants to buy this stuff."
Crude prices have fallen so low, producers have leased supertankers to store the oil at sea, hoping that oil will rebound.

Click here for the full story.

Wow! Amazing that on a day when OPEC cut production by 8%, the price of crude oil on the Jan 09 contract briefly dipped below $40/barrel.

Russia Considering Joining OPEC

“I would like to say that we are prepared for this [joining OPEC]. We must defend ourselves, since this is our revenue base, both from oil and gas. These kinds of defensive measures could be tied to lowering oil production, and participating in the existing suppliers organization, and participating in new organizations, if we can come to an agreement beforehand, so to speak.”

Russian President Dmitri Medvedev

If Russia does join OPEC, Europe will be even more at the mercy of Russia, since it buys much of its energy resources there. It could have costly consequences for Europeans who like to drive or stay warm in the winter.

Cuckoo for Cocoa!

I looooove chocolate, especially when the price is rising due to lack of supply from African producers! And I like even more every day!

Some of the Immutable Laws of Trading

Today I posted a comment to help a fellow investor/trader on Marketwatch.com.
Here is an excerpt of my comment:

"One of the cardinal rules I use in trading is called Rule #1 from a book by a very successful trader (who, by the way, gives it away FREE):
"Rule #1: Assume it is a bad trade until proven correct! Positions established must be reduced and removed until or unless the market proves the position correct. (from Phantom's Gift -- see my blog site for more info on the book -- absolutely at no cost whatsoever.)
"This rule has saved me a lot of pain, and has ironically also made me a lot of money! Not only is maintaining a losing position bad for my pocketbook. It is bad for my emotional state and it gives control of my money to the market instead of me keeping control of it in my hands."

If you'd like to read my entire comment, including some other laws of trading, you can read it here:
Treasuries Rise Again

The essence of Rule #1 is that you only stay in a trade if it is a profitable trade within a reasonably short period of time. All other trades are exited quickly! You don't put on a trade and then sit around praying that it will make money, all the while waiting with white knuckles and baited breath. By doing this, I save not only my money, but my sanity! I also guarantee that I will have money to trade another day!

Building the Treasury Bubble

Treasuries continue to move even higher. This is one monster bubble!

Has anyone stopped long enough to ask what is going to happen to interest rates when this bubble pops and/or the Fed starts to sell all those treasuries it is buying? One should consider also that when the Fed starts to sell, so will many other traders and investors. Just as many other investors are buying treasuries today (don't fight the Fed, right?), pushing them into bubble territory, when the Fed starts to sell, other investors will sell treasuries also. When that happens, I shudder to think what the consequences will be, both for the American People, and for interest rates!

Now THAT'S a Bull Market!

The Euro is in a new bull market -- higher 10 of the past 12 days (and if you blinked, you'd miss the two tiny dojis where the Euro closed lower). The Euro is higher for the past 6 consecutive days! Now that's one raging bull!