WEEKLY SUSI / EXHAUSTION UPDATE

SECTORS
^RUT: SMALL CAP BUY (18/05/2009): late follow on BUY signal with less upside..
XLU: UTILITIES BUY (27/04/2009): might have more room upside...
XLY: CONSUMER BUY (15/05/2009): Consumer are close to exhaustion, limited upside.
XLV: HEALTHCARE BUY (22/05/2009): the defensive HEALTHCARE looks vulnerable...
XLP: CONSUMER STAPLES BUY (27/04/2009): Staples had an extreme run and look heavy..
IYT: TRANSPORTS SELL (07/05/2009):Transports are exhausted.

The sectors feels heavy here and are either close to or are already exhausted. Mr. Market seems on the verge of some kind of consolidation.


GEOGRAPHIES
^SSEC: SELL (20/05/2009): China exhausted!
IEV: SELL (12/05/2009): Europe is on the verge of Exhaustion...
EWZ: SELL (28/05/2009): Brasil is tired and exhausted!

Will the hot money continue going to the emerging markets and old europe. SUSI is seriously questioning that ?


COMMODITIES
CRB: COMMIDITIES BUY (23/04/2009): stromg run since signal, but looks tired around here...
^XOI: SELL (12/05/2009): OIL Sector seems to ignore the run in OIL & triggers a SELL which is double bearish !!
USO: BUY (23/04/2009): so far good strength in OIL, but needs more momemtum to keep going..
DBA: SELL (14/05/2009): Agro is close to exhaustion!

Commodities had a great run so far which usually results in a growing amount of exhaustions. Agro and the Oil stock might take the lead here. Oil upside is limited!


Precious Matals
SLV: SILVER SELL (15/05/2009)
^XAU: GOLDMINERS SELL (14/05/2009)

...clearly exhausted which should limit the move from here


FIXED INCOME
TLT: 20YR TRASURY BUY (27/05/2009): downside exhaustion, limited downside, ie expect less yield pressure short term
^TNX: 10YR TREASURY YIELD BUY (15/05/2009): near exhaustion !
LQD: INVESTMENT GRADE CORPORATE BUY (28/05/2009): bullish for Asset Markets. LQD near Resistance.

The curve steepening should halt fairly soon. For how long ? ...ask again in a couple of weeks.


FX
DXY: DOLLAR INDEX BUY (12/05/2009)
USDJPY: BUY (23/05/2009)
EURJPY: BUY (19/05/2009)
mixed picture which means YEN weakness or USD strength.
One is bullish for Asset markets the other ain't...


Now that the month end is behind us the market should come close to another crossroad where he could opt to correct 20% or just stagnate for a month or two.

Also understand that Exhaustion readings normally behave like viral infects in a sense that they allow themselves incubation periods of +/-2 weeks before attacking the host.


Further pls. bear in mind that we are in the height of the silly season, meaning anything is possible here...

What going on in the FIXED INCOME land ....?

pls examine exhibits 1-3 

1) Zero's latest CDS update....highlights... "continuing the optimism/pessimism divergence between equity and credit/CDS.."

http://zerohedge.blogspot.com/2009/05/latest-dtcc-cds-update-week-of-may-22.html

2) Prieur du Plessis shows an "all clear" picture from the short term fixed income market

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2009/05/26/credit-crisis-watch.aspx

3) Curve Steepening craze

http://zerohedge.blogspot.com/2009/05/2s10s-curve-just-surpassed-record.html

If you feel your head is spinning, be welcome to the land of unintended consequences. We stresses last weekend (http://reflections-of-reality.blogspot.com/2009/05/dollar-deleveraging.html)

that curve steepening bodes ill in the current environment of a balance sheet recession.  We also mapped out in our 2nd DERIVATIVE THEOREM (http://reflections-of-reality.blogspot.com/2009/05/2-derivative-theorem.html)

 how one could create a virtual Sentiment surge which we now see displayed in EXHIBIT 2.   And don't forget the SMART MONEY the high stake rollers playing the CDS Market setting up the bear play.

Does this explain the picture ? The anser is no , but it tries to find "reflections" like YETI traces in the snow to at least picture the gigantic tug of war that is taking place between the Bulls vs. the Bears, Interventionism vs. Gravity, Smart Money vs. Dump Money......

This war can drag on for some time and lead to 2008 Replay or a SPX 1200 surge (after a short correction) followed by a later day of reckoning. 

 

German SUBPRIME MELTDOWN

THIS IS A MUST READ FOR ALL MY GERMAN READERS. Your humble blogger actually lives here in Germany and is pulling his hairs about the ignorance of the media and the lack of discussion on this very topic.

The all overwhelming election later this year paralyses any kinds of public discussions. Each night watching the news (we actually still have  good oldfashioned reliable news here in Germany) scares the hack out of me when I have to listen to delusional government politicians.

It feels like  roman "Bread and circuses" (http://en.wikipedia.org/wiki/Bread_and_circuses) where they sustain the notion of entitlements and social fairness  ignoring the dire straits of the financial realities. 

This article sheds eerily light on this... 

(and this comes from Chris Whalen from "The Institutional Risk Analyst" one of the leading independent voices in the US, not some conspiracy moron !!)

Germany's Subprime Crisis: Interview With Achim Dubel

http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=362

...just 2 appetizers on the state of delusion

"The United States is solely to be blamed for the financial crisis. They are the cause for the crisis, and it is not Europe and it is not the Federal Republic of Germany." 

Peer Steinbrueck

German Finance Minister

September 25, 2008

"Excessively cheap money in the U.S. was a driver of today's crisisÖ "I am deeply concerned about whether we are now reinforcing this trend through measures being adopted in the U.S. and elsewhere and whether we could find ourselves in five years facing the exact same crisis." 

Angela Merkel

German Chancellor

November 27, 2008

Dollar update

USDJPY at a crossroad. Look at the bullish set up with the timecluster and the SUSI Buy. BUT there is also the Head & Shoulders pattern. 

The next couple of days should bring clarity......

The Golden5: Breadth

Breadth always wonders what the Herd is doing. I usually start my analysis by assessing the McClellan Oscillator and Summation Index (sort of the proven workhorse that measures in a free sense the degree of particpation in particluar market moves) for an arbitrary portfolio of approx 60 "Elephant" Stock that are constituents of most Institutional Money portfolios.

This gives me an idea where the Elephants are going and whether this is consistent with other market indices.

The Chart below has 3 sections:

Section 1:
equally weighted Elephant portfolio performance

Section2:
a) The StoRSI on the Mc McClellan Summation which serves as a reliable turn indicatior, meaning you wait for the turn to occur before repositioning.

Current Reading: see (1) : correction in progress

b) A Mc OSC divergence Scanner that looks for higher (significant) lows & lower (significant) highs (see (2) last bullish reading was 2-3 weeks ago)


Section 3:

• The McClellan Osc
• The McClellan Sum index

What else can we observe:
a) the McClellan Summ. Index looks high and is trying to mover down (purple line)
a) the McOSC is in a neutral position with a downward bias (green line)

Conclusions:

1. The Elephants are correcting
2. Correction runs until it ends (McOSC and/or McClellan SUM and/or StoRSI moves up)
3. Correction could run weeks
4. The low to neutral position of the Mc Clellan OSC could hint at another MELT UP (BULLISH !!) episode before the correction will restart and run its course

Dollar & Deleveraging

At first let me share this Inflation/Deflation Chart with you that displays the view de jour by the Mr. Market and how this has led or better translated into the Dollar.

As you can see Mr. Market was concerned about Inflation over the last 2 month after a period of deflationary concerns...

It looks like he wants to turn his eye back on deflation. Let him show his hand and we will have to respect his decision.... 

The 2nd Chart shows why the Dollar is such an important market to watch for the time being. It also shows why a steepening Yieldcurve is actually a bad signal rather than a ray of hope. The notion of a Balance Sheet recession changes the perspective which is why we are at great risk.

As an aside did you notice the the sym. Triangle in the EURUSD has its tip pointing at May 22/26 and therefore alluding at potential turn.

This set up  offers Mr. Market a crossroad and the question is whether he will take it. 

Technical Analysis just provides a context not the catalyst.

Dollar Update

Sell in May again .....

Pls check out this graph of the Equity Options Put/Call Ratio (Proxy for Position-taking / Speculation) which has reached a similar degree as last May, especially  if you watch it through the lens of the Deviation Bands (as marked in the graph)....

The next couple of sessions will determine whether the rally will pause or break. 

Pls also compare with http://reflections-of-reality.blogspot.com/2009/05/scenario-analysis.html 

The Put/Call Ratios are just a different perspective or angle of the same think and should support our "CSI" mission on the traces of the ELEPHANTS.....

Volume update

Short term uncertain......

but medium term oversold....

...therefore we maintain a bearish bias.....

Intermarket Analysis

Fibonacci beauties....

Case1: A failed Fibonacci line in OIL....


Case2: A upside broken Fibonacci Cluster in HIGH GRADE CREDIT....

Case3: A failed Fibonacci Cluster in Europe (EAFE)....

Conclusion:

1. Not all markets are aligned yet
2. Major forces fight for domination
3. Volatility will rule
4. Bias to the bearish case
5. Weakness in Commodities will not allow green shoots over time, ie the contradiction has to be resolved
6. Weakness in Europe
   
   
   

Scenario Analysis

Where do we go from here. Trying to be open to both sides I've sketched out conceivable scenarios I can derive from the position of our VIX_OSC Indicator. (Deviation of Syn. SPX- cash SPX)

The Golden5: CONTEXT

The same Sectors that gained the most from the Rally are now taking the heat, above all are the Banks and the Industrials.

Pls note that Materials and Industrial good got less of the sun and more of the heat which kind of contradicts the notion of green shoots, which would see a incremental strengthening of the Industrial Segment........

On the other side we see a sector rotation into healthcare which is consistent with defensive strategies of the smart money.

As an aside, has anyone noticed what Paulson (not the former Treasury Sec but the smartest Hedgie out there...) has done with his money (click here) .Here you have guy who has done everything right over the lase 2 yrs, so it's worth noticing where the Elephants go........and they are not going into Banks, Industrials, Materials etc.

Cross Market Analysis

The OIL Complex is starting to become susceptible for a potential correction. Pls notice that SUSI (MOMO Indicator) send a sell signal and my TimeCycle Index point at a potential turning point in the near future.

The oil complex also has the tendency to follow a certain seasonality which seems independent of OIL bein in a bull or bear market. The Seasonality cleary send a bearish signal for June...

When we look further to the DXY (DOLLAR INDEX) and also the EURYEN pair we have to acknowledge a certain degree of exhaustion.Strength in the DXY will indicate that the next deleveraging phase has begun. The same is true for EURYEN which has experienced a remarkable correlation to all asset runs in the last years (CARRY TRADE) and which has also acted as leading indicator with some reliability. Therefore the recent weakness should serve as warning.

Bottom Line:Dollar Strength + Unwinding of EURYEN Carry Trade + weakness in OIL ==>> HIGH RISK

GOLDEN5: Breadth & Context

Thinks I liked ....

 

This really struck me ...

http://zerohedge.blogspot.com/2009/05/guest-post-why-i-am-freaking-out.html

Smart vs. dump Money

http://zerohedge.blogspot.com/2009/05/intellectually-challenged-rally.html

this shows safe it  is to buy.....

http://zerohedge.blogspot.com/2009/05/novelty-chart-of-day.html

It's coincidence that today's links refer all to ZEROHEDGE, allthough I have to admit Tyler is doing a fantastic job...

Good short set up: German Dax

Triple Fibonacci Cluster at a major Resistance area and all on the weekly chart in an oversold market. That's a fairly good SET UP. Susi signal on top would be perfect,.......(can still develop over next 1-2- months)

ANNA SCHWARTS Interview

THE ANNA SCHWARTS, 67 yrs at NBER, co-Author with Milton Friedmann.....and highly critical about Bernanke......he's not a Volcker.....

go to 3rd Hour Special Edition with
Eric King & Guests

http://financialsense.com/fsn/main.html

The Silly Season could peak soon..

Commodities (CRB) SELL SIGNAL














Semiconductor (SOX) SELL SIGNAL














Energy (XOI) SELL SIGNAL













NASDAQ EXHAUSTION SIGNAL

April- May is also known in the market as the Silly Season, a period where we experience the normal seasonal chance in the Market. Wild gyrations characterize the period as do temporary excesses in all directions.

Silly Season this time could turn into another inflection point fuelled by excess optimism and lots of Spin to foster the recovery story that has nothing real to show. All green shoots are within the statistical noise of all these time series and have no statistical significance. There might be some signs of relief but it is far to early and also highly dubious to interpret these 2. derivative green shoot noise as highly probable proof of a recovery. This is exactly what the market is pricing in.

Market tops are processes not data points so we have to look for leadership change or weakening to spot a potential turn. We find indications in the weekness of the NASDAQ and particularly there of the SOX (Semiconductor Index). Also we seem to observe exhaustion in the Energy as well as in the commodities space, which doesn't bode well for the recent OIL rally.

Conclusions:

1. We need Tech and Energy to recouperate their relative strength in order to sustain the rally or it will fail


2. The next correction has to defend the March low and should correct more over time rather than price in order to support the recovery story


3. The Euphoria in the Sentiment resembles eerily 1930 and should be taken as a warning
   

All taken together it means we enter a HIGH RISK period that could exacly do what most people do NOT expect, i.e. another 2008 replay.......

The Golden5: Rel. Strength

The GOLDEN5: BREADTH

Here a similar picture. The workhorse under the Breadth Indictors the McC Osc. which measures a degree of participation in the respective Index moves is showing a textbook divergence, indicating a diminishing number of stocks joining the party......

There is only that much the ultra BETAs can carry before the runs normally collapse.

If you add a 2-3 Sigma deviation from the 20d Average  then you can be assured that gravity will get get you......

Golden5: Volume update

Observe the extreme absence of Sellers, they were completely stepping aside awaiting the upside exhaustion, before attacking.

...... particularly Nasdaq is crying out loud for some relief.

The question will be how far the overstretched rubberband will revert.

Golden5: Sentiment

We are now officially in OVERDRIVE. Our VIX Oscilator has breaken out the first time to the upside since the beginning of the series which makes it unusual. The only comparison we have is on the downside from last year, which suggest some wild gyrations for the immediate future.

This raging BULL can run for onther week or so but the the likelyhood for this is decreasing by the day. This is like a streched rubberband and Mr. Market pulls day by day. The counter move should become explosive.

Will the stress tests be the catalyst ?

Will we experience a buy the rumor sell the news event ?

Mr Market will show us.............

....also allow for the possibilty of a "DOUBLE" like we saw last year on the downside, meaning a sharp downside correction the next weeks followed by a relentless upside ENCORE on the into late summer.

Risk Appetite

Golden5: MOMO

Another way to display my previously mentioned SUSI Indicator and the related SIGNAL is by my Pattern SCAN chart, where I overlay the SUSI signals.

Observations:

• CONSUMER DISC (Chart 1) has strong MOMO and shows a good PATTERN BREAK OUT, ie.e. clearly leading...
• COMMODITIES (CRB), Energy (XLE) and Semiconductors (SOX) have developped SUSI sell signals (chart 2-4)

Conclusion:

• Tech was the dominant force in the latest bull run and seems to turn which could be a sign that the move seems long in its tooth....

The Golden5: Context

Bear Market Rallies are steep and impulsive...and the current one fits the profile...

 Short covering Rallies focus on sectors that are economically weak (i.e. recession driven).......and this recession is about de-leveraging of banks and consumers and about weak production plans (materials and commodities), therefore those had to outperform the broad S&P500 (THE MARKET)

hat tip John  Mauldin

Sell in May in Bear Markets is obviously different than in bull markets. Pls see John's excellent post on this....

Bottom Line: Seasonal Factors supported by a short covering rally are lining up for a temporary seasonal TOP 

The 2 Derivative Theorem

The 2 Derivative Theorem means that if all paticipants are looking at the same data (like a car Dashboard),they most likely will all come to similar conclusions.

Therefore you don't look at the NEWS, DATA itsself but at how the "HERD" will interpret this info and decide whether you find the "herds' view"compelling or not.

Warning: Once everyone is looking at the same Indicators (technical and/ or macro indicators) you can easily change the  Sentiment or better the perception of reality by massaging the "commonly accepted true economic and market indicators".

The good news is that this can never be a perfect "crime" and that there will always been vestiges (it feels a bit like CSI) 

So how could this work:

......

1) start with a trust building media blitz incl. homestory with Ben Bernanke/ Obama

2) Stock market rally

3) Interventions in the Fixed Income market 

(must read from Contrary Investor http://safehaven.com/article-13233.htm)

4) Fed statments that alludes to an end of the worst of the crisis

5) Ignore the dire realities and sell hope

Pls ask your self whether the current "green shoots" euphoria reflects the current global realities. 

For this pls have a look at the graphs from the St. Louis FED provided by Barry Ritholtz

http://www.ritholtz.com/blog/2009/05/tracking-the-global-recession/

(hat tip barry)

6) Distract from economic realities and trigger emotional comfort/ solidarity by crusading hedgefunds and other ultra capitalist targets

7) Promise Welfare programs you know you can never effort

All the above buys you time which could suffice to turn the recession around, with the risk that if you fail you wind up in a position where

you have doubled down....

Don't get me wrong this could work ! But it feels like gambling in a casino where the they put all our money on red and if they fail we loose.

This seems to me as the ulimate MORAL HAZARD !!

Conclusion:

Price is the ultimate arbiter, Price is truth, You have to respect the market even if it defies your anchored believes.

On the other side we can experience temporary inconsistencies, i.e. diverging price signals in different markets due to distortions or adaptive processes (read interventions) that will trigger alerts that have to been taken very seriously.

Therefore coherent price signals are key rather then single market signals.

At the time of this writing the Inconsistencies are everywhere, in the stock market (look at previous Golden5 posts) and ever more important in the fixed income market (see again Contrary Investor http://safehaven.com/article-13233.htm). 

On the other side as Keynes used to say that the market can stay longer irrational that the participants solvent,  meaning we don't know to what extent the market can and will defy gravity .......

GOLDEN5: MOMO

One of my most reliant Momentum Indicator is my proprietary SUSI indicator. SUSI incorporates not only a Price (like RSI, MACD etc) but also a Time dimension and aggregates over 3 timeframes.

I have learnt the hard way that it is very risky to position yourself against her (yes SHE seems to have a personality....) , meaning the probabilities are then stacked against you. On the otherside a Move can be so strong temporarily that it overbalances SUSI (pls find examples in the chart). Additionally to SUSI I some of the Tom DeMark Indicators as confirmation tools.

A High Probability set up is ususally where SUSI (green line) shows a higher low (less MOMO and more tired move) on top of a Tom DeMark Signal (pls bear in mind that T. DeMarks can linger on for a week or two before showing action...) and vice versa for the Sell side.

Observations:

(1) SUSI is in the process of developing a higher high which proves strenth in the market !

(2) SUSI has not experienced a reasonable low since the Low, i.e. the current move is strong

(3) My time cluster (fibonacci driven) signals a potential pivot in mid to late May

Conclusions

1. The bull MOMO is strong
2. ...but lacks a good correction. The most bullish scenario whould be where SUSI comes down and sets a higher low levelwise in the proximity of the last low. This scenario could lead to a bull move into the late summer , ...but we'd need a reasonable correction (1-2months)
3. The current move could continue another 2 weeks
4. Time Cluster just highlight the opportunity of an emerging High or Low, which could also mean the shaping of an intermediate Low into the 2nd half of MAY which in turn could contradict SUSI for a short time period

Add'l Observations:

• The 2 leading sectors of Technology and Consumer Disc. have already shown good SUSI higher highs and Trendline breakouts which supports the a.m. from a context (Golden5: Context) point of view...
• ..on the other side the Banks are lagging or not confirming which is a clear warning...

GOLDEN 5: BREADTH

OBSERVATIONS:

• over 80% of all stocks trade above their SMA50
• "a good tide lifts all boats"
• the move from March was almost linear up

Conclusion:

• Look at the last 3 instances
• the chances are stacked against additional upside momo (momentum)
• the market is pricing in a perfect recovery in H2-2009
• all participants seem on the same side (bull)

It could run another week or two (more likely less now that the month end is behind us) but levitation should end at some point....