Financial Reform Brings Uncertainties

Markets sold off on Tuesday when new questions arose regarding the much unknown Financial Reform Bill which has been floating around, not being able to get approved as of now. However, it was announced today that certain bank taxes would be eliminated to help entice some of the moderate republicans to vote it on through to approval. As such, financials sold off as many do not quite know all of the consequences that will follow with the passing of this bill. At any rate, I expect to see continual weakness throughout this week (despite the good possibility of a rebound tomorrow). I thought I would post a good article going into more detail about the changes that was posted on Reuters:

Democrats on Tuesday planned to strip out a controversial tax from their landmark financial reform bill in order to win the swing votes needed to pass it through Congress.

With crucial Republican moderates threatening to withdraw their support, Democrats were weighing alternative ways to fund the most sweeping rewrite of the Wall Street rulebook since the 1930s.

Though a supposedly final version of the bill had been hammered out last week, Democrats in charge of the process called a fresh negotiating session, which got under way shortly after 5 p.m. EDT Tuesday.

Democratic lawmakers and aides said they planned to remove a $17.9 billion tax on large financial institutions. Instead, they would cover most of the bill's costs by shutting down a $700 billion bank-bailout program.

"I haven't talked to everybody, but I gather from a number of people they like this option,'' said Democratic Senator Christopher Dodd, one of the lawmakers in charge of the bill.

The bill had been expected to pass both chambers of Congress this week in time for President Obama to sign it into law by July 4. But supporters have been forced to scramble for votes in the Senate, putting that goal in jeopardy.

Analysts said while that timetable may slip, the bill was still likely to become law.

"We believe that this legislation will pass, timing and the bank tax remain the final question marks,'' wrote FBR Capital Markets analyst Edward Mills in a research note.

Democratic aides said it was still possible to pass the bill out of Congress by the end of the week.

Democrats are now two votes short of the 60 needed to clear a Republican procedural hurdle in the Senate. Democratic Senator Robert Byrd died on Monday, depriving his party of a needed vote, and Republican Senator Scott Brown said on Tuesday he would withdraw his support unless Democrats strip out a $17.9 billion tax that would apply to large financial institutions.

The tax was added to cover the costs of the bill during a final all-night negotiating session last week.

"It is especially troubling that this provision was inserted in the conference report in the dead of night without hearings or economic analysis,'' Brown wrote in a letter to the Democrats who are handling the bill.

Other moderate Republican senators who previously supported the bill have also expressed reservations over the new tax.

One of those Republicans, Senator Susan Collins of Maine, told reporters she was working with Dodd to get away from the tax and they were "making progress.''

"The bill is not perfect. But I believe if you take out the new bank tax that, on balance, it would improve our financial system and I would support it,'' she told reporters.

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More Recession Indicators

Thursday marked yet another day of strong selling as the Dow sold off almost 150 points by close. What really becomes surprising is that much of this was done in the midst of positive news. We've had a few strong earnings reports and yet investors are not feeling confident. I do feel tomorrow will be aggressively green as there should be some week end profit taking, so I picked up some longs before today's close.

With that being said, I think there are still a lot of downward pressures on the market. I wanted to share an article by Claus Vogt, an economic writer, in which he discusses some key things happening at this time which point to a longer recession. I've always been a believe in a probably double dip, and here are some good technical reaons why it will probably be the case:

There are two well-known and important leading economic indexes for the U.S. economy:

• The Conference Board’s Leading Economic Index (LEI), and

• The Weekly U.S. Leading Economic Index published by the Economic Cycle Research Institute.

I use them both in my analytical work to better understand the economy’s actual position in the business cycle. And in 2007, they gave me clear, recession warning signs.

So what are they saying now?

Leading Economic Index (LEI) Peaked in March

The LEI is published monthly. Historically its year-over-year percentage change has been one of the best recession forecasting tools available. Whenever it fell below the zero line for three months in a row, a recession followed. And it has never missed calling a recession since the 1960s.

The chart below shows you the history of this indicator. It looks like the LEI saw the high for the current business cycle in March 2010 when the year-over-year change shot up to 11.6 percent. In April it declined to 10.4 percent. And then last Thursday the May figure was released — a drop to 9.2 percent.

LEI YOY Chart
Source: Bloomberg

These are still high readings and far from the recession warning level. But what’s important is that the trend of this index has changed direction and is now heading down.

Also noteworthy is that the major positive contributors were the financial components. If you strip them out, the indicator’s recent readings were much worse …

Instead of plus 0.4 percent month-over-month in May, the reading comes in at minus 0.4 percent.

I think it makes a lot of sense to strip the financial components out since history shows that monetary policy looses much of its effects in a post-bubble economy. Hence it’s probable that the LEI is actually overestimating the outlook for the economy!

This apprehension is underlined by the behavior of the second leading economic index for the U.S. economy …

The ECRI Weekly U.S. Leading Economic Index Is Nearing Recession Levels

Last week the Economic Cycle Research Institute’s Leading Economic Index had its second negative reading when it fell to minus 5.7 percent from minus 3.5 percent. As you can see on the following chart, this indicator has been in a steep downtrend for many months and is now at its lowest reading in a year.

ECRI Chart
Source: Bloomberg

Historically, readings as low the current one have ushered in a recession 80 percent of the time. And readings below minus 8 percent have had a hit rate of 100 percent. So even though it’s not there yet, it’s getting dangerously close.

Lakshman Achuthan from ECRI said that it was premature to call a recession. The negative readings have “not persisted long enough.” I agree. And we’ll have to wait a little longer to know for sure.

Yet one thing is undeniably clear: The risk of a double-dip recession has grown considerably.

Best wishes,

Claus

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More Worries For Consumers

energy stocksMarkets once again acted with volatility on Tuesday as continuing weakening conditions are existing for consumers. Data was released today that showed a bit of increase on the manufacturing side, however, on the consumer side, weakness remained. From the data (and what I have seen and heard) we are getting a bit of traction on the large business side, but conditions continue to remain tough for consumers. Much of this is due to government policies that have been placed on banks and lending. At any rate, many economists do not expect this to change anytime soon for the consumer.

Energy suffered in today's trading due to a judicial ruling that overruled the moratorium that had been placed on offshore drilling by President Obama. As a result, the Dow sold off almost 150 points by close after being in the green for most of the morning. Volatility is continuing to ramp up, which is dangerous element in a sensitive market.

Current bond trading is pointing to worries of deflation. That's right, deflation is still weighing heavy on many investor's mind as large amounts of activity on the short side of Treasuries have been seen. There is a lot of danger of playing in long term bonds at this point, as interest rate risk is at record high levels.

Look for another volatile day tomorrow. For you day traders, you will probably make out great. I expect to see a rather large difference between what the market opens at then where it closes. I will be very active in the morning while at the same time issuing strict stop losses. I will keep you posted. Happy Trading.

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Housing Double Dip Expected

housing recessionStocks once again showed volatility risk on Monday, as what was once a 140 point gain on the Dow in early morning trading, turned into 8 point loss by close. Investor confidence is experiencing intra-day shifts which can pose as a disaster for trading (especially with stop losses). As a result, sources have told me that a lot of money has returned to the sidelines for the time being as things become sorted out.

Today's blip happened when China announced their decision to float their currency. China hopes that the move will stimulate inflation and help with exports in their economy. However, other countries reacted negatively to the announcement, considering that China has been the bailout source for many economies. It will be interesting to see how this effects trading in the long term.

Meredith Whitney publicly announced her concern for a "double dip" in the housing sector. This is not a new theory by all means, but anything being vocalized by Whitney definitely gets investor's attention. As of late, it seems that whatever comes from her mouth, becomes a reality. Today it was dealing with the decline in the residential market.

This should not be that hard to fathom. Just as Whitney said, banks are now beginning to accelerate their foreclosure process. Last year, this could not happen due to the extremely large demand of foreclosures mixed with the large lack of staffing in the banks to handle all the paper work and processing. Well, the banks have been ramping up the past year and have rebounded quite well, from a stock price standpoint, and are ready to take over your property (for the most part). The days of not paying a mortgage for a year will soon be at an end. As we do see an increase in foreclosures, you better believe that it will directly effect supply and home prices.

In addition to this, unemployment pressures continue to beat upon consumers. Thus, delinquency rates continue to climb. As foreclosures continue to be on the rise, a suggestion for a recovering (or even stabilizing) residential market does not make sense. Economics 101 states the simple principle of supply and demand, which when you apply to the housing market, supply way outweighs demand. I expect steep housing price drops as we move out of the busy season of summer into fall and winter.

As a result the market continues to be a volatile instrument. I expect to continue to see large volatile swings, which can be fun for you day traders, and dangerous. I do still think there is much more long term upside on the short side of the market at this point. As more uncertainties pile up, it will be reflected into market trading. Happy Trading.

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In Times Like These, Follow The Dividends

verizon dividendWhen you look at days like today in terms of trading trends, it may be a bit frustrating when trying to decide what positions to take. Short term trends have been very strong, however, looming economic pressures are still very much present, making it a risky move to move into a bullish position. On the flip side, bears have been severely punished for the last year and a half, so holding a bear portfolio may seem out of the question.

Sure, eventually the more macro trends will begin to take place, but that has yet to be seen the past couple of months. The market has been ping ponging back and forth. As a result, unless you want to partake in the guessing game, there are certain positions which are definitely more appealing in this type of trading environment.

For me, I am finding a bit of a safe haven (with less risk) in investing in stocks that are yielding higher dividends. There are a couple of reasons why it make sense at this point.

First, historically, high dividend yielding stocks outperform during a downward market. In 2002, when the S&P fell 23%, companies who did not issue a dividend fell an average of 30%. Companies that did only fell 11%. In 2008, we saw this also be the case, as dividend paying stocks outperformed non-dividend paying stocks over 6%.

So why is this the case? First of all, the thought is that if stocks are going down anyway, you might as well receive a good dividend in the process. Also, good dividend paying stocks are very popular for retirement accounts (401K and IRA) which helps keep the volatility much lower. Not only can you enjoy a greater hedge against a potential market crash, but you also get nice monthly dividends as well.

Another reason these securities tend to do well is because stocks issuing strong dividends is because if companies have the retained earnings to issue them, they are usually performing with strong revenues. Thus, companies with these trends historically hold up better in worse times. Here are a few companies with extremely large dividends. KSP, AGNC, CMO, CIM, VZ and RSO. Happy Trading.

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Rebounding Rallies and Crude

BP CrashAfter today, it would seem that investors have gotten over the most recent strains that were evident in markets recently as the Dow closed well over 200 points on Tuesday. Much of today's gain is a result from settling nerves regarding the European crisis, which seems to have softened a bit at the moment. Volatility still remains on high alert, so I would not be too confident in taking bull positions at the moment, at least I am not quite yet in my portfolio.

The public was just recently informed that the new estimates for oil leaking into the Gulf is much worse than originally expected. As such, I would expect BP's stock to not react well during tomorrow's trading. Already, it was bad enough as it is and with increasing spill levels, that problem only gets bigger for BP. In fact, I wanted to share with you a premium update charting video on Oil, which is being offered free for CMS readers, definitely worth watching.

S&P trends are passing strong thresholds right now. The big question is whether they can hold. A lot of attention will be put on new support levels. Just as with the oil video above, here is also a good S&P trends video update as well. You can see the new support levels are crucial. Happy Trading.

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Big Intra-day Swings

new iphone salesFor now, we are smooth sailing back above 10,000, which makes many of the bulls happy after the nerve racking jolt markets have received the past few weeks. However, low volume mixed with large intra-day swings continues to make markets a very unstable to buy into at the moment. Today was a perfect example of that. At its highest point, the Dow was enjoying 100+ gains for the day, as investors were once again finding security in higher risk securities. Bonds and treasuries were getting hit in the morning as confidence was climbing. However, into afternoon trading, Greece received yet another downgrade from S&P and investors reacted to the negative news by taking cover. The Dow closed down 20 points.

Volatility is becoming more and more normal on a daily basis at this point. In fact, it is very reminiscent of market trading in the last quarter of '08 (minus the consistent huge crashes in the market). The volatility, coupled with the low volume is making it real hard for investors to feel comfortable buying more risky securities. Until the Euro becomes stabilized, I believe that volatility should continue to be expected.

With Europe's problem, we are continuing to deal with the oil spill in the Gulf. BP's shares have taken an enormous beating and are at an all time low as the oil giant continues to commit to paying for the clean up. I am sure they would have much rather dealt with Bush in this situation than Obama, as The President is making sure the pay for every last drop and then some. BP will come out of this and grudges will be dropped, but I don't see an entry for them anytime soon (definitely down the road though).

Real estate remains to be another huge question mark. It seems as just as something begins to gain traction in the industry, something else brings it down again. Transactions are increasing as sideline money is becoming itchy. However, banks are cooperating less and showing less leniency for loan modification. On top of that, many real estate professionals are aggressively fighting the proposed "Carried Interest" bill that is floating around the Senate as we speak, that could essentially increase taxes for partnerships of up to 120%. You can believe that will show up in the bottom line. A double dip seems extremely likely and I would be surprised if we didn't see that begin before the end of the year. Fall and winter months seem to put real estate on ice.

As for now, longing the dollar, gold, and short term treasuries seem to make sense. This uncertain volatility creates a dangerous environment for trading, both on the long and short side. The NASDAQ still remains to be the princess of the prom, and I expect that to continue as we go further throughout the year. Also, be prepared for yet another run from Apple when those new iPhone revenues (and continual iPad sales) start to hit their earnings reports. Happy Trading.

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More Selling Momentum

stock tradingMarkets are continuing to move with a strong selling pressure. Despite certain daily rebounds, the overall trend continues to remain on the downside, which is not ending well for bull investors. I wanted to share a great technical read from Money and Markets that goes into this critical trading trend that has been forming the past month. Despite positive news, the momentum remains down. Enjoy:


A Market of Stocks

There are technical indicators based on this reality. These are found by using market breadth data — the number of rising and falling stocks and the respective volume figures.

The Arms Index is one of those breadth-based indicators. It’s calculated with the following formula:

_(advancing stocks/declining stocks)_ (volume of advancing stocks/ volume of declining stocks)

This helps me look beneath the market’s surface: A ratio of 1 means the market is in balance. Higher than 1 tells me that more volume is moving into declining stocks. And lower than 1 means more volume is moving into advancing stocks.

During bull markets, the Arms Index rises above 3 every now and then. That usually indicates the end of a correction and thus a buying opportunity.

In bear markets, defined as markets with falling 200-day moving averages, an Arms Index above 3 still signals oversold market conditions. But the buying opportunity is often just a short-term one and much less reliable than in bull markets.

The History of Double-Digit Arms Index Readings …

The chart below shows you the history of the Arms Index since 1980.

NYSE ARMS Index Chart

During this 30-year span (it’s also true going back 50 years) the Arms Index rose into double-digit territory only four times:

  • October 19, 1987, Black Monday, the day the Dow plunged over 22 percent in one of the most infamous stock market crashes in history.

  • October 27, 1997, which turned out to be the stock market’s low during the Asian financial crisis.

  • February 27, 2007, this marked the low of a short, but hefty correction.

  • June 4, 2010, last Friday.

The first three instances turned out to be either outstanding or — in the case of 2007 — good buying opportunities. So does Friday’s reading of 13.22 signal another buying opportunity?

A Major Difference in the Big Picture

Friday's high Arms Index reading indicates the next move is bound to be bearish.
Friday’s high Arms Index reading indicates the next move is bound to be bearish.

Let’s first address the major difference between 1987 and 1997 on the one hand and 2007 and 2010 on the other …

The first two instances happened during a long-term bull market that began in 1982 and lasted until 2000. Both signaled longer-term buying opportunities.

The latter two took place during a long-term bear market that began in 2000 and will probably last a few more years. The one in 2007 signaled a short-term opportunity. And that’s exactly what I expect from the most recent occurrence. It’s marking only a short-term low.

In the bigger picture, last Friday’s stumble serves as another warning sign that the next major market move will be a severe bear market. A bear market as severe as or even worse than the 2007-2009 bear market, which was heralded by the record-breaking Arms Index reading in February 2007.

Keep in mind, though, that like all technical indicators, the Arms Index is not infallible. It has to be interpreted in the context of the bigger picture. And as you have just seen, this bigger picture is unequivocally bearish.

Best wishes,

Claus

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Goodbye 10,000?

spanish bank crashFriday's employment surely hung over investor's head over the weekend as markets experienced yet another strong selling day on Monday, in which the Dow closed down 115 points. Despite a morning rally, selling prevailed in markets as more uncertainty set in. Job loss reports were well below expectations on Friday, which caused for the bulk of the selling to close out last week. Unfortunately, a lot of variables hang over our economy's head, which is not providing an environment conducive for stock buying. Here are some factors that keeps our economy in limbo.

Financial Reform Bill
Much of what we have heard has been hear-say in regards to the large bill that is causing people all over the world wondering what this bill is going to do. President Obama would like the bill to be signed by the end of the month, however, those are aggressive goals. The fact remains that not much is known about the bill as well as what consequences we should expect with it passing. As long as it remains in limbo, I expect financial stocks to do the same.

European Banks
We have seen extreme weakness in European banks (especially Spanish Banks) recently, which is dragging down the global sector. The crisis in Greece is not helping things and if it were not for China bailing them out, there could be some serious problems.

Cleaning Up The Oil
It may seem that there is little correlation between an oil spill and larger scale economies, but that is not the case. In fact, the recent BP oil spill is continuing to create a lot of noise in the marketplace. 20,000 barrels of oil are flowing through the Gulf of Mexico as we speak, which there is no telling what kind of effects we can expect from that. The spill damage far surpasses original expectations and is only making oil consumers more angry in buying their product. Clean up that mess!

China's Slowing Pace
Much of the fear to global analysts was the rate at which China's economy was growing in such a little amount of time. Many felt that the country's economy would fall just as hard as it grew. However, thus far, China has seemed to manage well with it's slower growth periods and minimize any lopsided whirlwind. Thus far, China has been a good bailout for many failing economies (including the US) and needs to stay that rock in the midst of many declining markets.

These coupled with the continuing employment woes that the US economy is faced with, makes it hard to gain real momentum behind a rally. Sure, we should see rebound days here and there, but I cannot think there can be a significant run in the markets until many of these unknowns are solved. For the most part, the shorts have been performing very strong the past couple weeks and I look for them to continue to perform strong the next few weeks. Happy Trading.

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June Nervous Selling

bp stock dropsTuesday's trading trends brought memories back from late 2008 days. In fact, trading trends for the past few weeks have been very reminiscent of the uncertainty days of 2008 in general. To me, it is clear that the fast pacing, bullish rally has temporarily come to a close as it has been very difficult to gain momentum on the buy side. Even on days where strong data is released, selling continues to prevail. Today, was another wild swing day, which resulted in the market having an aggressive sell off to close the day and ultimately close the Dow down 112 points.

So why the selling now? We saw from recent months that the market has barrelled through uncertain times with flying colors. There are a couple answers to the questions. First of all, we've seen a return of volume. For most of the first quarter, volume levels remained critically low. Many of the institutions and big players remained sidelined and played the market very "safely" as to not get blindsided. Lately, we have seen a very big gain in average volume, especially on days of strong selling. As the volume continues to increase, it will be harder for market movers to manipulate indexes to move in the direction they want.

Secondly, we are now reaching global pressures. The US was center of most problems that began in 2007. Thus, it us the most. Although global pressures also existed, the US seemed to be experiencing it the worst. As we saw seeds of a bottom, many jumped back on the US bandwagon, trying to take advantage of those early reversal gains (which many did!). However, now global pressures are taking over headlines and there is a lot of speculation that those pressures can and will directly affect the US. Whatever the reason may be, the charts are looking quite optimal for short positions.

Manufacturing and select tech companies seem to be the only reasonably "bright spots" in the market at this point. Oil is taking a beating thanks to the BP disaster in the Gulf and residential builders are hurting from more and more reports of consumers selecting not to pay their home mortgages anymore. Ultimately, we cannot anticipate just how great effect these pressures will have on the US economy, but we can estimate it will be great. For many, taking a pretty good profit from the past year's gains is good enough and cash and bonds are looking better than ever. Today's inability to hold in the green shows that even with a new month and a new week, new beginnings are getting harder to make. For me, I am out of almost all long positions, and have been enjoying gains from some shorts and the VXX ETN. I expect continuing rebound rallies to occur frequently, but I do see a strong downward trend at this point. Happy Trading.

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