If You Can't Stand The Bullishness, Look at the Charts!

I can't stand it anymore! After this record advance in September everyone is bullish. Investor sentiment is bullish, CNBC is bullish, even I am bullish (actually have been since late July). Perhaps I simply am a rebel and must feel like I'm marching to a different drum beat, but upon waking this morning I embarked on a mission to prove or disprove the case for the rampant optimism I'm seeing everywhere. While I'd normally provide chart upon chart of manipulated macro economic data I simply started drawing lines on 3 year weekly charts. I'll keep the commentary to a minimum, but leave you with a string of charts that highlight significant markets I follow.  Please note, I will indicate several areas I'm watching for a breakout, but to be honest we've seen a pattern of breakouts through important levels where everyone is watching just to see significant reversals once everyone gets on board.  . I'm putting these levels in my system so I can be alerted and watching for continued momentum that is maintained.




SPX (The 1150 level still seems to be resistance) - no breakout yet.

XLE (Energy) - Watching $56.50 here.

XLI (Industrials)- XLI looks like it has poked its head above resistance.  There is that long term downward sloping trendline still overhead, but this tells me that XLI could run another dollar or so before testing this.

SMH (Semi-conductors) - $28.75 would be interesting as this has not broken out yet

XLF (Financials)  - I posted this chart last week and it has been very helpful in showing that there is no breakout in financials.  There was a punch through to $15 and a quick reversal back inside the trendline.  Of all the charts I'm posting, I think this is one of the most useful.

LQD - Investment Grade Corporate Bonds-(Breakout has obviously occurred.  In fact, we should expect a drop back into that long term channel, however corporate bonds have been the beneficiary of much of the government's attempts to force investors to increase their risk and drive them out of CDs and money markets.  Traditionally, we'd expect the equity markets to rally when LQD goes lower, however that typical correlation has been on hold since May 2008 when all asset values collapsed and enjoyed a subsequent rise from the ashes. 

LQD with SPX overlay -Has LQD rallied too far and does a correction in bonds suggest more upside for the $SPX?

SLV - (Silver) - Sure, this is clearly a breakout!  SLV is above its previous peak of $20.65.  I'm still not selling my holdings of physical silver here, but I'm certainly not adding any SLV at this level. 

JJC - (Copper) - Yes, breakout has happened.

EEM - (Emerging Markets) - Yes, this too is clearly a breakout.  Since late July I've advocated holdings in emerging markets based on the comparison of GDP growth rates in these countries to our weak US growth and also the specter of QE2 which is targeting the devaluation of the dollar.  It appears there is significant room to run here.

TLT (20 Year Treasury Bonds) -  Risk on or risk off, the Fed's intervention in the treasury markets will in my opinion  put a floor on TLT for some time.  While interest rates SHOULD be rising here it is clear that this operation is more of a budgetary mechanism to ensure we can actually pay our bills.  The Fed and Treasury Department cannot allow rates to creep higher or else we face significant issues.

TRADING SUMMARY -
Well, that's it, I hope this summary of charts gives you a view of areas that we should be watching for the upside or a reversal. Many key areas are close to upside breakouts and we're seeing continued momentum in precious metals and emerging markets. XLF (financials) continues to look weak and this is going to be a key indicator for me to watch (it always is). It is almost as though XLF is telegraphing to us that something is going on and the story just hasn't hit the headlines yet..

IS THE BULLISHNESS WARRANTED?
The obvious answer is - perhaps! In terms of economic reasons I doubt it, but that was not the focus of this post. For me, this exercise has confirmed that we really are in a significant area here that could propel us to much higher levels. I would not be amazed to see a move through these levels, but I'm also aware that we are simply at the top of the trading range we've endured for almost one year.



The bear in me looks at these overhead resistance levels as good areas to enter shorts and allow for some room for a bust-through and reversal. The tinfoil hat wearing trader in me thinks we could see more positive action ahead.



Be Careful -
GOATMUG

DOES OBAMA REALIZE THAT AHMADINEJAD IS A NUT?

President Obama speaks out against Ahmadinejad's comments at the UN.

http://www.bloomberg.com/news/2010-09-24/obama-calls-ahmadinejad-s-united-nations-remarks-offensive-hateful-.html

I believe that our President is finally acting appropriately when examining issues with Iran's nut job leader.  Obama condemned the remarks made by Ahmadinejad that stated that the 9/11 attacks were planned to save Israel and boost the US economy.  President Obama said these comments were offensive......ooooooh!  Now he is talking tough.

As many of you know, I believe that Obama and his advisors have lived in a world that is naive and simply childish.  They continue to rely on hope that all the world's people want the best for everyone and while there are differences we can just all get along.  This is a real view they attempted to bring to the diplomatic table in the first year of Obama's presidency.  That we could extend a hand to "Imadinnerjacket" that he'd play nice and drop all aggression toward Israel and the US. 

What Obama never understood (and probably still doesn't) is that there are purely evil people in the world that care about nothing other than power and destroying those they hate.  Kim Jong Il of North Korea is one of these.  He lives like he is an emperor while millions of those in his country starve to death literally in the streets.  He does not care a bit about the "success" of his people, they exist to serve and provide luxury for him.  Likewise, Iran's leadership is not concerned about the welfare of the people, they do not view their job to be one of representing their citizens interests.  These men have their own interests whether they are after regional power projection, religious zealousness, or simply gratification of some other desire.

Even in his comments yesterday, Obama extended the offer to Iran to allow them to have "peaceful" nuclear energy programs!!!  What a clown!  Like this whole effort for nuclear power has anything to do with electric power!  It has everything to do with the extension of power within the region and the destruction of those that Iran's leaders hate.

Ahmadinejad is the worst kind of adversary for Obama because no matter how nice and rational we are in extending offers to have them play nice, Iran will confound a world view that suggests that each player will make a trade or deal for the best interests of all those involved.  Iran's leadership is interested in a zero sum game where they win and we lose.  This is why allowing them to have nuclear (anything) is so dangerous.  Our experience with North Korea is similar.  Once they had a nuclear weapon, you can't do anything with them.  In fact North Korea immediately attempted to sell its technology to Iran, Syria, and whoever else we don't know.

Do I suggest the only road to dealing with Iran is a military confrontation?  No.  I believe isolating them and attempting to support a insurgency from within is the only way.  A direct attack on their leadership will actually galvanize their citizens to feel attacked and might even provoke a defense of their crazy leadership.  We will not have any success though as long as China and Russia continue to aid and support Iran.  I've posted that Russia is purposefully assisting them to poke a stick at us.  Without Russian and Chinese support, I believe that Iran would have already had a revolution as their people would have no choice but to rise up and throw off their leaders that cause terrible sanctions to be place on their back.

President Obama, I'm glad you are waking up.  Unfortunately you are soft and saying things like "those comments are offensive" will not change the situation and ultimately reveal how impotent you and your strategy of hope really is.

GOATMUG

XLF UPDATE - RANGE BOUND OPPORTUNITY?

Here is a look at the XLF that I've been watching closely since I posted the Euribor numbers the other day (Sept 16th) which I thought might be a tell as to the direction of the market.  The truth is that banks have been sluggish lately as they have churned around in the upper portion of the range over the last couple of weeks.

Even after this post, we saw a breakout that started to get me excited and then it has turned out to be the ultimate head fake (what is new since all patterns have turned out to be head fakes?). 

The chart posted below is a good one in my opinion because it shows a confluence of many trend lines all centered at the $14.75 area.  As we open up this morning, it wouldn't be too much of a stretch for XLF to drop to the $13.45 lower portion of the range we've seen and then bounce. 

I don't want to overdo things here by getting too bearish and assuming that we are going into the pit.  The recent trend has been to open lower and end the day higher, so I will sell all of my short trading position (long FAZ calls) this morning at the open just to lock in some gains.  There has also been a recent trend to have weakness at the end of each month and especially at the quarter end and then rocket higher after portfolio managers complete their window dressing for regulatory disclosures. 

TRADING STRATEGY -
Overall, I'm harvesting gains (last night was the harvest moon) and not getting too bearish and greedy.  I like nailing a trade like I did yesterday where I bought those FAZ calls at the close, but I don't want to endanger those profits by getting greedy.  The recent strategy to accumulate longs on weakness has been profitable, no reason to change this now.  I will look to add to long positions as we near the bottom of the range (if we get there).

COMMODITIES -
I'm still an uber bull on commodities since Bullard's telegraph of the Fed QE2 strategy in July and August.  Commodities have been on a tear and the dollar has been just clobbered thanks to our great leadership.  We'll probably see more of the same and countries are really getting after trying to crush the values of their currencies.  Competitive devaluations are pretty nasty and it is every man for themselves right now.  Just ask the Japanese and Brazilians.  Look for active devaluations as this is really heating up.  China and Japan tensions are getting hot.  Watch this issue.

TLT -
Here is one last parting shot on TLT.  Remember when the market was rallying and everyone was saying that the long bond (treasuries) were a bubble and they were going to blow up and everyone wanted to buy TBT forever?  Pretty interesting reversal again and still over that important $100.15 level that is marked here as a breakout.  As mentioned several times, we will have 3% 30 year mortgage rates and we will only get there when TLT stays at these levels and higher.  I don't anticipate going back underneath the $100.15 level for a long while.

GOATMUG

EURIBOR RATES BEGIN TO RISE ACROSS THE CURVE - CAUSE FOR CONCERN?

I've been in pretty good sync with the market lately and have been trading well.  It seems that for this last cycle or two I've been able to capture rallies and short swoons at the best time.  Even now, I've ridden the last 6% move in the market here and have been quite bullish.  Just as I say those words though, I'm quite certain that we are bumping against the 1130 to 1150 range that has been difficult to exceed.  Call it pervasive bearishness or just the trader's mentality to want to exit when I have profits, but I spent last night and this morning looking for short-term signals that the wheels of the rally could be coming off.  Perhaps this is a hint that something troubling might be coming to slam this rally back down to the lower end of the range (1040).

Please click on the Euribor rates below.  I look at these figures almost every morning and have not seen a consistent move like this in quite a while where every time frame ticks higher (meaning the banks charge each other more to borrow).  Before we put too much stock in this we must marry this with the comments from  the Greeks that say they will not default (when do you trust the Greeks?).  The no-default scenario would obviously be a good thing, so I remain watchful and glad I've got some profits, I'm not selling yet, but am vigilant.

Above is a quick snapshot of the S&P500.  Is there any wonder that I'm watching that 1130 range, it has held for the last several rally attempts, why would it be different this time?

GOATMUG

JAPANESE CENTRAL BANKERS GET IN THE GAME! (CAN THEY LEAVE AT THE TOP OF THE HILL)

A super quick snapshot (who can do more than that at 12:49 AM in the morning?) on the impact that our Japanese Central Bankers are having as they intervene in the currency markets.  Essentially they are attempting to force the Yen down because the strength of their currency is hurting their companies as they try to export to world countries.  Since our (the world's) currencies are worth less it takes more of our currency to buy their products.  In the world of global competition, this is a no-no.  No one wants a strong currency, just ask the Chinese - they have artificially weakened theirs for years in an attempt to dump their junk on us and keep the prices low.

As I stated many times, ALL of the central bankers will join the race to zero interest rates and keep the "growth of the economy going".  When their policy tools have been exhausted, they sometimes rely on the mechanism to attempt to spur asset price increases by attempting to drop the value of their currency.   In stating this, I made the prediction that we'd see some (several) major currency devaluations this year.  The Japanese are doing their best to get in the game.

As of now, here are a couple of screen shots of my favorite site to check on the status of the Nikkei when I can't sleep, or am about to drift off into a pleasant dream.  If you want a real time Nikkei update this is a good site - http://e.nikkei.com/e/fr/marketlive.aspx

So, what is the result of all this intervention?  Well, just as we see here in the USA when the central bank makes efforts to devalue the currency, the stock markets lift off in a celebration!  But like most parties, the happy times usually don't stay that way.  Back when I used to drink I used to have a saying that you needed to leave a party "At the top of the hill".  That usually meant that when I was having the best time it was a signal that I needed to leave.   Unfortunately we've seen that central bankers have no concept of leaving before the party is overdone.  Their history of blowing bubbles and pushing easy money and lax credit on undeserving consumers is well documented.  Why would we expect the Japanese that have tried these measures many times to be successful now?  While the party may continue for a brief time, this should set us on alert for a new rise in the yen (after it drops for a couple of weeks) and for a new fit of competitive devaluations from central bankers all around the world.  We can't let the Japanese have all the fun can we?

If you own Toyota (TM) and you get a nice pop on the move perhaps you should consider leaving while your at the top of the hill.

Who gets hurt in this?  Well, first off, any trader around the world that was long (held) yen.  The drop in value of the yen could really damage a trader's account especially since most traders use leverage (borrowed money) to create out sized gains (and losses).  Second, a Japanese citizen that is looking to purchase goods from outside the country can now buy less of that good with the same amount of yen.  Finally, if this could somehow actually create inflation in Japan (it won't) then holders of those awesome Japanese bonds that yield 1% interest each year could see the value of their bonds clobbered.  Now it is important to note this isn't an official devaluation like we've seen from some of the emerging markets countries, but the impact is clearly focused at intervening to drive down the value of the yen.

Be careful.

GOATMUG