Fed Returns to Boost Market - Will We Ever Have Reality Again?

Stocks staged a massive rally this week with the S&P 500 rallying more than 300 points or 12.2% from the previous week.  Of special notes, REITS (real estate investment trusts) rallied the sharpest, rising 24%.  Midcap stocks which have been underperforming for quite a while also turned in stellar weeks, with the Midcap (MDY) and Russell 2000 (IWM) rising 18%.

From an industry perspective, all sectors of the market rallied.

 
Basic Materials, a sector that failed to make new highs in the latest market bull thrust, performed best, rising 20.6%.

Closely following was the financial sector, rising sharply on the Federal Reserve Bank’s latest stimulus announcement
Federal Reserve Stimulus - CNN article

I had been paying close attention to a number of exchange-traded funds to gauge the health of the US economy.  It appeared to me that low interest debt had enabled businesses that might have failed in 2008-2009 to remain.  These had often been referred to as Zombie Corporations.  As interest rates continued to fall, businesses were able to issue more and more debt to stay afloat.  Eventually, some event would trigger this debt to default.  It was my thought that when these ETFs started to drop in price, it would be an indication of an impending recession.

One of my proxies for this lower quality debt was an instrument with the ticker symbol JNK.  As the symbol implies, the debt held in this ETF is just that, junk.  You can see that this ETF price fell off a cliff.  There was a real possibility that heavily debt-ridden companies would go bankrupt.  But that reality quickly came to an end as the Fed announced that they would bail out not only quality corporations, but shaky corporations as well as states, counties and likely foreign banks and governments as well.  Soon the Fed will own the entire world.


Other ETFs that the Fed may now be buying include:

If the Federal Reserve Bank can buy these ETFs, and the Fed can’t lose money, then if could be foolish to try to fight the trend.  Or so it seems.

What's Next?

In a normal world, the rally to the 50% retracement level is by no means extraordinary.  While many oohh and ahh over the remarkable rally, the Fibonacci retracement levels automatically include a 50% retracement along with the real Fibs of .328 and .618.  In some theories, prices failing at the 50% retracement level can be expected to fall to the -.23 level.  This would suggest S&P prices falling to the 1900 level.

It's hard to imagine this to happen though.  Despite 16 million people filing for unemployment and businesses across the world being shut down, liquidity has always seemed to reign supreme, despite any fundamental support.

Once again, markets have no correlation with reality.



Money Supply Spikes

As the chart of the M1 money supply illustrates, money supply has been surging to dizzying heights, now backed not only by government treasuries but also a wide range of corporate bonds.  Some can interpret this as the Federal Reserve Bank and the US Treasury taking control over US corporations.


The increase in the money supply is said to be temporary and will be pulled back when things normalize.  But as we've seen post-2009, things never normalized.  Any attempt to decrease the money supply was met with swift negative market reactions.  This is the new reality, 0% interest rates, increasing Federal Reserve stimulus actions to keep the financial structure afloat; many suggesting that it won't be long until the Federal Reserve starts buying stocks.  Again, does it make any sense to fight the Fed?  It does appear to be inevitable.  But ultimately, must it fail?

I thought it might but after 11 years of the Fed-controlled market, I do not expect to see a normalization in my lifetime.  As such, I choose to stay out of stocks, except for special situations such as some gold and silver mining stocks.

I continue see gold still as a safe haven.  In times of loss of confidence in fiat currencies, gold stands out as one asset that can provide purchasing power.

Gold futures rallied to new recent highs but still are a few hundred off of the lifetime highs.  One can expect gold to continue rallying and perhaps even silver following.

Two Schools of Thought

Inflations:  Gold and real estate are often said to be good hedges against inflation.  The sharp move in REITs this week along with gold making new highs supports this view.

Deflation:  How quickly will the economy recover?  Some suggest that things won't start getting back to normal in July, the President is pushing to get things moving as quickly as possible.  A slowing economy might present a deflation scenario.  Holding US dollars is often recommended to ride out this storm.

I suggest holding both.

Jobs Data Delights All

STOCKS SURGE

The Bureau of Labor Statistics (BLS) reported employment gains far exceeding even the most bullish expectations Friday.  Preliminary numbers indicate that payroll employment increased by 287,000 in June.  US stocks climbed to highs on the news with the Standard and Poors 500 index closing at 2,129.90.

BONDS SURGE

US Bonds surged to all time highs Friday on BLS reports that the number of unemployed individuals in the US increased by 347,000.  The Unemployment Rate advanced 0.2% to 4.9%.

The 30 Year Bond Yield Index (TYX) closed at 21.10 (2.11%).  Levels not seen before.  Exchange Traded Fund (ETF) TLT, an easy way to trade bonds on the stock market, closed at an all time high of 143.60.

PRECIOUS METALS HIT MULTI-YEAR HIGHS

Not to be left out of the party, precious metals, although they sold off initially when the employment news was released, quickly reversed and closed at multi-year highs.

SLV, one of the ways to trade silver on the stock market,  ended the week at 19.22, up $0.48 or 2.6%.


All in all, most things did well with the exception of European and Latin American stocks and commodities (not including precious metals).

This all comes as no surprise.  As mentioned last week, the jobs number didn't really matter.  Central banks, unable to get any kind of inflation going, are desperate to stimulate the economies and continue to print more and more currencies in an effort to do so.  It's not really working but the extra added juice sure does some good stuff to the markets.

For a few years now, I've been accumulating physical gold and silver even as I watched prices fall, seemingly forever.  It's not easy for most people to look at physical things like precious metal bullion coins and not think of them in terms of their worth in dollars.  The trick in the understanding is to realize that since 2008/2009, the Federal Reserve has increased the money they have created from around $800 billion to over $4 trillion, nearly a five time increase.  Local banks, through the fractional reserve system, create additional multiples of this amount.  When you understand how much new money has been created and then consider that there is absolutely nothing that backs this currency, a prudent person would be thinking "I've got to turn this worthless currency into a hard asset as soon as I can."


A CHART TO THINK UPON

As I am always talking about gold and silver to people, the one thing I hear all the time is, what good is it?  You can't eat it.  They can't conceive that the US Dollar could be as vulnerable to devaluation as the Russian Ruble or the Mexican Peso.  The truth is, any paper currency is only worth what others accept it to be worth.  If a dollar crisis were to occur, something similar to what continues to be happening in Greece, one needs some form of money to transact daily business with.  Who knows how it can or will play out.

Throughout much of civilization, silver has been used as a currency and perhaps someday, it will again.  If it were today, and the stock market was priced in silver, this is how it would look.

So while the stock market may be going up and even making new all time highs, remember, when we are looking at price charts of the market, it is soaring based on purchases made with paper money that has no real value.  It was created from nothing, with no assets backing it up and is being used in unlimited quantities to keep pushing stock prices higher.  But the stock market, when priced in terms of something that has an intrinsic value, like silver, is in a Bear Market.


BONDS (TLT) PRICED IN GOLD (GLD)

Looking at bonds in terms of gold, this is breaking down as well.

Don't let surging markets influence your buying decisions, Central Bankers can create the illusion they wish to create.  If we do our homework, we can catch a glimpse of reality.

Market Bids up Miners

Barrick Gold (ABX) Weekly chart - 18.77

 



After two years of cost overruns and sinking gold prices, 2014 has started off with a reversal in tactics for Barrick Gold.  Old management is on the way out and new management is coming in.  And while ABX earnings are still nearly four weeks away, it appears that the market is expecting some positive news for this gold and copper miner.  The fact that gold and silver prices are starting to come to life also help.

 

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Another item of note is the negative action of Emerging Market Stocks.  South Korea is already down 6% this year.  Russia, China, Brazil and others are also down.  Is this merely the results of a strong dollar?  Or is there a rotation in the works?

 



Perhaps a precursor of things to come?  Will the US markets ever crack?  Only time will tell what this means.  My guess however is that the Dow will rise stunningly before this comes to an end.  There are still trillions of dollars sitting on the sidelines.  One thing that over 40 years of market watching has shown me is that the market will find a way to take every penny you have.

 

When you see the Dow double or even triple from it's current level, sell everything.  Leave the country and go to some island that doesn't yet have CNBC or Bloomberg.  It's the only way you will be safe!

 

 

More to come. . . 

 

 
 

Dollar, Bonds Surge The World Is Not a Safe Place

The dollar surged today but interest rates, despite a very strong 5.7% increase in the GDP, fell back sharply. This means only one thing. There is FEAR out there in the world. Don't neglect the implications of the SAFETY TRADES. There is something going on. Take some profits while you have the opportunity.

Stocks Back Down But.....

Stocks slipped this week but the 6+ point decline in the S&P still managed to keep the index above 1,000. Really, I have no faith in what is going on but as I mentioned a few days ago, I question whether there really was a recession in the first place or was it all a big sham to funnel more dollars to the banks?

I continue to stay hedged but occasionally take a shot. For example I bought some Bank of America the other day at 15 or so. There was no denying the banks. They have been on a phenomenal run and why not? The government has already determined that 19 of them are too big to fail and no matter what comes down the pipe in the future, Uncle Sugar has guaranteed to sustain them.

Look at the run of BAC in just the past few days. I remember years ago when the S&L crisis hit and remember how cheap BAC got. Think it was down to 6 or so. Then it sky rocketed until the next banking crisis. Well, I got in a little above 15 and as it was approaching 17.5 last week, I sold January 17.5 calls and got another 2.5 in premium. Not a bad strategy considering. Should the stock continue to run for the next five months, I get a 5 point total return on a 15 investment or 33% in just five months.

Should the market fall back and BAC decline, my cost basis has been reduced to 12 1/2 instead of 15. I can continue to sell options on rallies and enhance my income.

What are Interst Rates Headed??

As rates fell today, I was thinking that perhaps those who are calling 10 year rates to fall to 3% might have a point. After a subdued CPI number, increasing unemployment claims, increasing mortgage defaults, anticipated commercial real estate debacle, etc., how can one think that the market or interest rates can possibly go up? We all know that the recent spurt in the economy was due to the stimulus packages. What would the retail sales number have looked like without the 2% increase in auto sales??? Things are really bad and are bound to get worse.

Could we have a "double dip?"

Well, as we know, as the market goes, rates SHOULD go. Diversification is a good key now as the two vehicles, stocks and rates are pretty well correlated. You can protect yourself well now against anything that might happen. If you are thinking that rates will rise, the TBT ultra short 20+ plus ETF is a great hedge to have in your portfolio against rising rates, especially if you are long bonds and interest rate vehicles.

For now, all evidence appears to be strong for higher stock market prices and interest rates. As mentioned in a previous blog, I think that the 1029 S&P level is the critical point. Expect a bit more upside action.

While some famous technicians on tv state that another October meltdown is out of the question at this point, I am a child of October meltdowns and make sure that all of the puts that I buy on selected stocks run at least until Jan 2010.

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Mid Month SP Rates Review

It's only mid-May but I like to look at what might come as we approach month end. Both stocks and interest rates fell today. Many are suggesting that the market power is waning. The Stress Test results are in and the whole review seems to be a sham. Talk is now turning to credit card defaults while the number of homeowners receiving foreclosure notices continue to increase.

I've also been hearing a lot more about Ron Paul's bill that allows an audit of the Fed. There appears to be a growing awareness of the fact that the Fed is a private organization consisting of bankers. That the Fed is taking trillions of taxpayer dollars and giving it to it's own constituents is beginning to trouble a few. Politics aside, there still is a mistrust of Wall Street, especially banks. While the US has assured us that no bank will fail, the banks may cause the US to fail.

The market was down after a two month run. The next two weeks will tell the story. I invite you all to send me an e mail requesting Trendsetter updates and the June edition. I expect to have some great trading ideas over the next two weeks that only subscribers will know about.

Have Rates Topped?

After 30-plus years active in the markets, I know that one must absolutely respect the trend. With two weeks to go still, I'm not sure how this chart will play out. The upside does appear to be running out of steam but I do believe that just as with stocks, the next two weeks are going to be the key.

I did get a little spooked though and closed out my Note Options today one week before expiration. I had one short call position remaining as I expected rates to rise but today, I felt some doubt and closed. We are up 7% for the June option period. I might reestablish the short call position should the 10 year rates hit 3.08%. From this level rates might stage a run at the 3.44% mark. On the monthly chart though, the trendline is coming in at 3.16%. We closed today at 3.13% after trying to get through the 3.16% level.

The next two weeks is certain to be a special time for short term traders. I expect to be active in both stocks and bonds. You might be able to see from these monthly charts that we are close to some serious points in the market.

Again, I encourage you to drop me an email and tell your investor friends. The Trendsetter subscription is still free but it won't stay that way forever.

Producer Prices Up 0.3%

Rates fell further this morning despite a worse than expected Producer Price Index reading of +0.3% in April. Higher food prices led the surge. Initial unemployment claims data was also released this morning showing that the unemployment problem continues. While today's report showed 637,000 more jobs lost, more troubling was the increase of 6,000 in the four week moving average showing that momentum continues.

Chart Pattern Shows Opportunity

Notice how rates have come to the bottom of the channel. It's no surprise that rates have backed off as they near strong resistance at 3.44%. I expect that rates will remain down on the week and moderate at low levels through next week. Next Friday Options of Bond and Note futures expire and the low rates cause futures prices to be higher. I expect the following week, that rates will again surge, breaking through overhead resistance moving towards my target of 3.6%.

Now is the time for extreme caution with your investments. Again we appear to be setting up for the same situation that sunk many investors last year, that is prices of both stocks AND BONDS are setting up for declines. Without EXPERT investment management many are sure to get clobbered again. Keep in mind that while diversification is the key, diversification means having a portfolio of assets that are NOT CORRELATED. Having a good mix of stocks and bonds might not be enough as it appears that BOTH STOCKS AND BONDS WILL GO DOWN!!!!

Make sure that your investment manager can show you proper risk management strategies to make sure you are NOT TAKEN TO THE CLEANERS - AGAIN.

Rate Volatility Increases Despite Lull

Despite the recent rate decline, when we look at the weekly Volatility Chart (Size, we see that Size is Rising and a primary trading rule is that when Size Rises, Stay with the Trend. If we take a read of where the average size price comes in, we see it's around.25. At average size levels, a +2 standard deviation move from the trend line would put us at the 3.5% level.

Looking at the daily chart, we appear to be right in the middle of a large pennant. The weekly chart we posted earlier today showed the potential for an up move, bouncing off of the four week average. There is heavy overhead resistance illustrated in both charts.

Already, many analysts are worrying about the surge in oil prices. I've seen gas prices surge from 2.20 to 2.65 within a week!. Some say that already the recession is about over and so there is increasing demand. Others say that oil is way overbought and that there is no reason for it going so high.

Oil Prices on the Move!

The weekly oil chart looks pretty bullish to me. I don't see resistance on this chart for a long way to come. We have been bullish on oil from the beginning of the year as we believed that trashing of the dollar would be best played by investing in oil gold and other tangible assets.

And EVERYTHING ELSE!!!

It's not just oil. Look at the CRB index. It also is going up. For Fed Chairman Bernanke to say that deflation pressures are easing but we still need to worry about them, he's certainly looking at something different. But we all know that there is nothing that the Fed wants more than inflation. Very soon they will get their wish. MAKE SURE YOU ARE PREPARED!

Rates Setting Up For Surge

Rates have been moderating since last week's surge. Did the Fed intervene? Are rates moving too quickly?

On a weekly chart, we can see that there is still a strong upward trend that the rate is resting on. The line comes in at 3.16% on the 10 year rate. In recent posts, we have identified similar situations "inter-week." Rates always seemed to rally from this trend. We will be positioning ourselves appropriately,

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