Upside Looks Likely in June

The pace of advance has clearly slowed as May was a month of consolidation in the equity markets. The lack of a pull-in indicates that the bullish sentiment remains in tact. The current pattern is a bull flag with the low end at 875 and an upside breakout to occur at 930. The 200-day moving average has served as resistance but approaching 50-day may trigger an upside move. 875 has proven to be an important level acting as resistance 3 times, and then support twice. This level may act as a springboard this week. Monday begins a new month and more upside looks highly likely.

Debt, Debt & More Debt

The United States public debt level hit $11.31 trillion in May. The last 15 years have seen the US government debt grow from $4.6 trillion to $11.3, an annual compound growth rate of 6.2%. The growth of US debt over the last 15 years far outpaces the increases in gross domestic product. The current actions by the government are made especially worrisome because as the US fights the current recession with debt in the short-term, we also see an extremely challenging long-term situation. As many have said before, the days of reckoning are somewhere on the horizon.

Cyclical Bull Market Seen

Following excerpted from Bob Brinker's Marketimer newsletter:

We define a secular bear megatrend as one during which the major indexes make no material and sustainable progress above their historic highs. During such extended periods, a series of cyclical bull and cyclical bear markets occur...

...The current secular bear megatrend began on March 27, 2000, as measured by the S&P 500 Index. Although this index registered a minor new closing high in October of 2007 by a slight margin of 2.5% over the March, 2000 closing high, the recent cyclical bear market carried the index to a close of 676.53 in early March of this year. Although we expect this year's March closing low to mark the absolute closing low for this secular bear megatrend, we expect a series of cyclical bull and cyclical bear markets to unfold until the megatrend is exhausted. The fundamental underpinning to this trend will be the tremendous fiscal challenges facing the country in the years ahead. These challenges will also make the proper conduct of monetary policy a very difficult exercise.

Here are the cyclical market trends dating back to March of 2000 as measured by the S&P 500 Index:

Cyclical bear market I from March 27, 2000 to March 11, 2003 lost 48%;

Cyclical bull market I from March 11, 2003 to October 9, 2007 gained 95%;

Cyclical bear market II from October 9, 2007 to March 9, 2009 lost 57%;

Cyclical bull market II from March 9, 2009 is now in progress.

Monthly Market Update (May 2009)

	April	Year-to-Date	One Year
Dow Jones	4.07%	-3.15%	-32.78%
S&P 500	5.31%	1.76%	-34.27%
Nasdaq	3.32%	12.51%	-29.26%

No Need to Fear Inflation, Says Krugman

The Big Inflation Scare
by: Paul Krugman
Published: May 28, 2009

Suddenly it seems as if everyone is talking about inflation. Stern opinion pieces warn that hyperinflation is just around the corner. And markets may be heeding these warnings: Interest rates on long-term government bonds are up, with fear of future inflation one possible reason for the interest-rate spike.

But does the big inflation scare make any sense? Basically, no — with one caveat I’ll get to later. And I suspect that the scare is at least partly about politics rather than economics.

First things first. It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.

So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.

The first story is just wrong. The second could be right, but isn’t.

Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.

Still, don’t such actions have to be inflationary sooner or later? No. The Bank of Japan, faced with economic difficulties not too different from those we face today, purchased debt on a huge scale between 1997 and 2003. What happened to consumer prices? They fell.

All in all, much of the current inflation discussion calls to mind what happened during the early years of the Great Depression when many influential people were warning about inflation even as prices plunged. As the British economist Ralph Hawtrey wrote, “Fantastic fears of inflation were expressed. That was to cry, Fire, Fire in Noah’s Flood.” And he went on, “It is after depression and unemployment have subsided that inflation becomes dangerous.”

Is there a risk that we’ll have inflation after the economy recovers? That’s the claim of those who look at projections that federal debt may rise to more than 100 percent of G.D.P. and say that America will eventually have to inflate away that debt — that is, drive up prices so that the real value of the debt is reduced.

Such things have happened in the past. For example, France ultimately inflated away much of the debt it incurred while fighting World War I.

But more modern examples are lacking. Over the past two decades, Belgium, Canada and, of course, Japan have all gone through episodes when debt exceeded 100 percent of G.D.P. And the United States itself emerged from World War II with debt exceeding 120 percent of G.D.P. In none of these cases did governments resort to inflation to resolve their problems.

So is there any reason to think that inflation is coming? Some economists have argued for moderate inflation as a deliberate policy, as a way to encourage lending and reduce private debt burdens. I’m sympathetic to these arguments and made a similar case for Japan in the 1990s. But the case for inflation never made headway with Japanese policy makers then, and there’s no sign it’s getting traction with U.S. policy makers now.

All of this raises the question: If inflation isn’t a real risk, why all the claims that it is?

Well, as you may have noticed, economists sometimes disagree. And big disagreements are especially likely in weird times like the present, when many of the normal rules no longer apply.

But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.

Needless to say, the president should not let himself be bullied. The economy is still in deep trouble and needs continuing help.

Yes, we have a long-run budget problem, and we need to start laying the groundwork for a long-run solution. But when it comes to inflation, the only thing we have to fear is inflation fear itself.

http://www.nytimes.com/2009/05/29/opinion/29krugman.html?_r=2&ref=opinion

My Analysis:

While this article runs counter to many of the arguments recently, I enjoy studying opposing perspectives. Here I will voice a couple of my humble objections. I find Krugman's analysis rather unconvincing. The inflation argument does not see inflation currently and does not advise the government to stop fighting the recession. The government must take unprecedented measures in difficult times. But, once the economy turns, and inflationary pressures increase, the government will be too slow in reigning in the easy money, or so the argument goes. I do find very interesting the contention that banks are holding their cash thus not increasing the public's money supply. Yet, the fear of inflation can create inflation itself as price setters increase prices to meet future expectations. In the end, time will tell. Either way, the weakening dollar should still give a boost to precious metals, namely gold.

PIMCO's "New Normal"

Excerpted from Mohamed El-Erian's May 2009 "Secular Outlook"

What Now?

It was clear to us that, despite the very high hurdle that we always apply to such a statement, the world has changed in a manner that is unlikely to be reversed over the next few years. Put another way, markets are recovering from a shock that goes way, way beyond a cyclical flesh wound.

It is not just about the major realignment of the financial system and the extent to which governments have intervened to offset market failures. And it goes beyond the massive increase in government deficits and government debt in virtually every systemically important country in the world (at a time when few countries can credibly pre-commit to the type of fiscal primary surplus required to subsequently reverse the massive deterioration in the debt dynamics).

It’s also about the structural change in how savings are mobilized and allocated, nationally and across borders. It is about the shifting balance between the public and private sectors. And we should not forget the potentially long-lasting consequences of the erosion of trust in such basic parameters of a market system as the sanctity of contracts and property rights, the rule of law, and the robustness of the capital structure. Such trust can be lost quickly but takes a long time to restore.

The result is a prolonged pause, or in some cases, a violent reversal in certain concepts that markets had taken for granted. We referred to it as the demise of the “great age” of private leverage, asset- and credit-based entitlements, self-regulation, policy moderation, and shrinking direct government involvement. Not surprisingly given the extent of the gains that were privatized and the losses that are now being socialized, the demise is occurring in the context of popular anger, confusion and what one of our speakers called “a morality play” in parliaments around the world.

This is not to say that the global economy has no defenses. It has. Policymakers are fully engaged in an effort to avoid another Great Depression. The secular forces of productivity gains and entrepreneurial dynamism will not disappear. And there are pockets of considerable economic and social flexibility, high self-insurance, and even some global policy coordination.

Yet, while these factors help reduce the risk of a deflationary depression, they are not strong enough for a return to the high growth and low inflation that characterized 2002–07. Simply put, there are insufficient demand buffers and fast-acting structural reforms to provide for a spontaneous and sustainable recovery in the global economy.

No wonder we have characterized the financial crisis as a crisis of the global system (as opposed to a crisiswithin the system). Lacking endogenous circuit breakers, the system will not reset quickly and without permanent changes (and some would argue that even if it could, it should not). For markets that are highly conditioned by the most recent periods of “normality,” this will feel like a new normal. Indeed, it will be a major shock to those that are trapped by an overly dominant “business-as-usual” mentality.

The New Normal

For the next 3–5 years, we expect a world of muted growth, in the context of a continuing shift away from the G-3 and toward the systemically important emerging economies, led by China. It is a world where the public sector overstays as a provider of goods that belong in the private sector. (As one of our speakers put it, we have transitioned from a world where the private sector provided public goods to one where the public sector provides private goods.) It is also a world in which central banks and treasuries will find it difficult to undo smoothly some of the recent emergency steps. This is particularly consequential in countries, such as the U.K. and U.S., where many short-term policy imperatives materially conflict with medium-term ones.

Steepening Yield Curve

Since the beginning of 2009, the US government yield curve has steadily steepened. The front end of the curve has seen a minor 14 basis point uptick while the back end has experienced a 176 basis point rise from 1/02/09 to 5/27/09. This steady steepening demonstrates rising expectations for inflation as the economy begins to recover. Investors need greater compensation to counteract the interest rate risk they are facing in longer-dated maturities.

Inflation Concerns On the Rise

The spread between the 2-year and 10-year Treasury notes is on the rise hitting the highest level ever yesterday peaking at 2.76%. The rising spread is reflective of the overall yield curve in the US markets. The yield curve has been steadily steepening since going inverted in 2007. Recently, the spread has seen a surge from the December 2008 low to hit new highs. Investors are beginning to price in higher inflation going forward and, in turn, lenders to the US government are demanding higher yields for longer maturities. The fears of inflation are coupled with Federal Reserve's aggressive actions on the short end of the curve to keep rates artificially low. The market may be forecasting an economic recovery which will trigger increased inflation.

Treasury/Equity Correlation

Today's Treasury auction results led to a significant sell-off in the equity markets. Active traders would be well-advised to continue watching this relationship closely in the coming weeks. Fears of a US government debt downgrade are festering. The Federal Reserve's burgeoning balance sheet will not be able to absorb all of the Treasury's offerings and yields will rise. Increased volatility in the bond market will likely have major impacts on stock prices. Tomorrow, watch the 1:00 PM EST release of the 7-year note auction of $26 billion. An easy way to monitor this relationship is through the TLT exchange-traded fund.

Debt Yields Climbing

Despite the Federal Reserve's downward pressure on rates through the purchase of $300 billion in long-term Treasuries, the yield on the 10-year Treasury is climbing from the December 2008 low. Investors have been demanding higher yields pricing in the possibility of a ratings downgrade after Standard & Poor's downgraded Britain's debt to "negative" from "stable". On May 21, Pimco's well-respected Bill Gross helped further stoke fears of a downgrade saying the US will "eventually" lose is AAA-rating. Higher rates will further complicate the precarious situation in the US economy especially given that the Fed will not long be able to depress rates with its burgeoning balance sheet. The panicked flight to safety at the end of 2008 has reversed course and the US will now be forced to pay for its debt once again rather than being paid in real terms.

Consumers Seeing a Turnaround

The May consumer confidence reading handily topped estimates of 42.6 with a reading of 54.9. This is the highest reading from consumers since September 2008, just before the October market collapse. The Conference Board reports that consumers appear to believe that the worst is behind us. The consumer confidence number is based on a survey of 5,000 households gauging their views on business and employment conditions. Increased consumer confidence will lead to higher levels of spending and increased GDP.

Chrysler Dealer Pain

Our friends over at Zero Hedge did the leg work on this one but I thought it was too telling not to reproduce it here. The US automotive industry has drastically changed and will likely never be the same. Each dot represents a Chrysler dealership that has been ordered to close.

Hardest hit states:

• Pennsylvania: 53
• Ohio: 47
• Texas: 45
• Illinois: 43
• Michigan: 40
• California: 31
• New Jersey: 30
• Florida: 29
• New York: 26

Market Rally Stalling

After bouncing from the March 6th lows the market began channeling higher within a 60-point range for several months. Yet, this week of trading may have forecasted a change in trend. While the S&P ended slightly higher for the week, the end of the week's action showed significant selling pressure. The S&P put in a lower high on Wednesday and saw heavy distribution Thursday and Friday breaking the lower rising trendline. The S&P is currently flagging below the ascending trendline retesting the break. The failure into the close in Friday's trading confirms weakness in stocks, albeit on lower volume.

Ascending channels are useful technical patterns that highlight the pace of a rally as investors pick up shares on pull-ins and sell rallies at repeated distances in line with the overall sentiment. Typically, ascending channels have bearish implications on a downside break as psychology changes. A downside break of an ascending channel forecasts a move lower equivalent to the width of the channel. The current pattern is a 60-point channel with a break at 890. The pattern then calls for a pull-in to the 830 level which coincides with a 38.2% Fibonacci retracement.

In the longer term, even with this trade the markets will still favor a strong bullish propensity. I suspect that this trade will be a slow grind lower and will establish a defined trading range for the summer months. I do not see a retest of the bear market lows and I believe stocks may then range between 830 and 930 for several months as the VIX falls. Technically, a retracement of merely 38.2% manifests considerable strength. The break of the channel more or less shows that this recent rally is stalling and the market needs time to consolidate the move.

Volatility To Fall As Market Bases

After putting in a low on March 6th the market rebounded with speed. Within a week and a half the market was nearly 20% higher. Momentum soon slowed and stocks entered a rising channel and have trekked higher ever since within the confines of the channel. Buyers have continued to step in on pull-ins while sellers step into rallies. Overall, the bid remains extraordinarily strong and a retest of lows looks highly improbable.

Yet, the 200-day moving average intersecting around 940 and the approaching 1,000 resistance level are likely to stall the rally. Stocks will not rise in a straight line and the 1,000 level will trigger technical selling and will act as a difficult psychological barrier. This level, coupled with a falling value for the VIX, leads me to believe the market may begin basing between roughly 850 and 1,000 throughout the summer months to consolidate the move off lows. As fear overwhelmed at the beginning of 2009 stocks saw continued selling with valuations hitting seldom seen levels. Perception shifted though and stocks rallied in expecation of improving economic conditions. This pause now will allow the actual future economic conditions to catch up to the recent repricing for more optimistic scenarios.

If this plays out as expected, active traders will see lower volatility and, in turn, less edge. The summer months may be great times for vacation.

Encouraging Signs From VIX

The VIX broke below 30 yesterday hitting levels not seen in the 9 months since the bankruptcy of Lehman Brothers. Lehman Brothers' bankruptcy on September 15, 2008 caused panic in the markets and drastically increased volatility. The markets saw heavy selling with the VIX spiking through 30 to begin its 2-month explosion to 89.53, a new all-time high. Yet, as the markets have found footing and mounted a nice rally off lows we are seeing a pervasive calm in the market signaled by the reduction in implied volatility. Hitting pre-Lehman levels shows a significant reversal in sentiment even while the Dow is currently trading 2,500 points lower.

Early Signs of Inflation

The month-over-month producer price index preliminary reading came in at 0.3% today. This rise back into positive territory may indicate the easing of deflationary pressures and growing inflationary forces. The consumer price index, which tends to lag the PPI, showed a 0.2% rise last month. The dramatic decline in crude oil prices at the end of 2008 accounts for much of the fall in inflation measures. Recent upticks from the October lows show that perhaps the Federal Reserve's liqudity measures have put an end to a feared deflationary spiral. In the case that the economy rebounds into 2010, there seems to be no way to avoid hyperinflation. The recent rise in prices is especially surprising given the 6.1% decline in 1st quarter GDP readings. Prices appear to be rebouding while the U.S. economy continues to decline. This data may be a very early sign of troubles to come and provides further credence to the argument for buying gold and commodities as inflation hedges.

Trade Idea: Long GLD

Current Trade: Enter GLD Long @ $90.30 with stop @ $84.90 for maximum 6% loss.


I was stopped out of gold on April 6, 2008 as my stop loss was hit at $86 but I have continued to watch the commodity. To me, this trade is just a matter of time and I have been patiently waiting for a compelling re-entry. I believe that time may have come.
The fundamental rationale for this trade is quite simple. I believe the Federal Reserve's actions throughout this recession have severely debased the US dollar. Trillions of dollars have been printed and inflation seems to be the only outcome once the economy begins recovering.

Technically, the trade has been setting up for a while. In my previous post on gold, I explain some of the longer-term technical patterns but more recently gold has pulled back off the $1,000 level retest for a 50% retracement of the $300 move. The pullback found support at the previous downtrend break coinciding with the 50% retracement level. The double bottom at this level confirms strong support and indicates a possible move higher. This level should hold going forward and a trade can be entered through the recent highs at $90.30 with stops placed below the recent support at $85. This trade offers a maximum risk of 6% and a possible high reward. Expectation for reward is a move through the $1,000 level and prices upwards of $1,500.


This trade is not a recommendation of a buy or sell transaction. The trade may or may not be entered by TWS Investments. This website is not intended as an advisory service.

So Much For Shorting

Thursday's 102-point drop in the Dow led many to believe that the top was in for the market's current rally. The 33% rally looked to have stalled with the release of the stress tests results and the inevitable pull-in looked to have begun running its course. Yet, Friday stunned many as the Dow rebounded rallying 164 points closing on the highs of the day and achieving a new high for the 2-month rally off the March 6th lows.

As many of the short side are stopped out of their positions once again, it is useful to understand how far the market could rally without much change in the underlying economic circumstances. Many pundits continue to argue that the market has rallied too far, too fast without the necessary improvement across the economic landscape. But, if a large portion of the market's crash was caused by panic, a subsiding of that panic should allow stocks to rally even if conditions do not change.

It was best said by Charles Mackay, author of Extraordinary Popular Delusions and the Madness of Crowds, when he wrote "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one." Mackay argues that while people panic in crowds, panic only subsides as people individually realize that perhaps the situation is not as dire as they once thought. It seems that we have a very similar situation occuring in our equity markets.


Lehman Brothers' bankruptcy was, as Warren Buffet said, an "economic Pearl Harbor" that caused panic in the credit markets. The credit market freeze was evidenced by the incredible spike in the TED spread (the difference between three-month futures contracts for U.S. Treasuries and three-month contracts for Eurodollars (investopedia.com)). The TED spread serves as a proxy for the pricing of risk. In one of my previous posts, Fear Abating, I highlighted the dramatic spike from a spread of 1% in early September to a new all-time high of 4.64% on October 10th. As Federal Reserves around the world unveiled aggressive liquidity programs, credit markets began to thaw and stabalization set in by the end of the 2008.

Three days after Lehman filed for the bankruptcy, the government restricted short selling of 799 financial companies. This unprecedented move caused a large jump in stocks and in two days stocks fully recovered the drop caused by the initial Lehman fallout. But, as if markets suddenly realized this sort of manipulation would do nothing to fix the situation stocks plunged falling 3,505 points in 15 days. Complete panic had hit the markets exacerbated by frozen credit markets which forced many institutions and hedge funds to blanket sell their most liquid holdings, equities.

But, as we moved away from the October 10th low equity markets began to stabilize and the TED spread dropped back to prior levels. Panic receded as participants gathered their senses and markets stopped falling. The beginning of 2009 saw further weakness in the stock market with the Dow breaking lows again and dribbling lower throughout February and into March. March 6th saw an intraday low of 6,469, stocks turned on a dime and began rallying to where we are today.

Now, I am not trying to argue that the Dow will quickly recover to 11,000 or that the entire bear market was simply caused by fear. Rather, I am merely attempting to outline a line of thinking whereby traders can understand how the stock market can rally much farther and faster than one would believe without much fundamental improvement. The abating of panic will allow stocks to rally because irrational fear drove them to extremely depressed levels.

Traders must be very nimble on the short side and be willing to give up the short bias quickly as it continues to be proven incorrect week after week. Clearly, stocks will not rise in a straight line and there will be at least a pull-in at some point. But, that time has yet to come and there is enough justification for a massive rally as investors simply "recover their senses slowly, and one by one".




*This article was featured on SeekingAlpha.com

Stress Tests: No Surprises

The Federal Reserve announced the long-awaited results of the bank stress tests offering few surprises as most of the report was leaked throughout this past week. Under the Fed's analysis, in the worst case scenario, banks could face up to $600 billion in further losses through 2010. Ten of the total 19 institutions will be required to raise a total of $74.6 billion to shore up their balance sheets.

American Express	Pass	KeyCorp	$1.8B
Bank of America	$33.9B	MetLife	Pass
BB&T	Pass	Morgan Stanley	$1.8B
Bank of New York Mellon	Pass	PNC Financial	$0.6B
Capital One	Pass	Regions Financial	$2.5B
Citigroup	$5.5B	State Street	Pass
Fifth Third Bancorp	$1.1B	SunTrust Banks	$2.2B
GMAC	$11.5B	US Bancorp	Pass
Goldman Sachs	Pass	Wells Fargo	$13.7B
JP Morgan	Pass

Short-Term Top Tomorrow?

Many market participants have been waiting for some time now for the market to offer a decent pull-in. That has yet to happen. Yesterday, the S&P 500 joined the Nasdaq in positive territory for year-to-date performance now up 1.8% YTD, still lagging the Nasdaq's 11.6% gain. The S&P has now rallied 38% off the March 6th intraday lows of 666.79. In the entire rally, the largest pull-in was 6.4% over a 3-day period. Clearly, any short willing to step in front of the train has been run over and buyers have been forced continually to chase this move off the bottom only propelling stocks higher.

Many chart technicians have looked for the short far too early and have missed out on much of the possible gains. I saw possible fundmental triggers for a top in this rally being the 1st quarter GDP results or the stress test results. Well, the GDP number came and went with the market finding cause to rally on the back of a 6.1% drop in advance GDP as investors found hope in the 2.2% rise in consumer spending. With the stress tests results scheduled for release tomorrow, traders have clearly "bought the rumor". Perhaps the market tops tomorrow as traders "sell the news".

Company	1-Month Performance	Company	1-Month Performance
American Express	79.02%	Wells Fargo	76.00%
Bank of America	46.20%	Regions Financial	37.83%
Bank of New York Mellon	8.17%	BB&T	59.56%
Capital One Financial	74.65%	Fifth Third	71.92%
Citigroup	41.91%	KeyCorp	-3.15%
Goldman Sachs	19.35%	PNC Financial	40.37%
JPMorgan Chase	31.99%	State Street	17.97%
MetLife	28.88%	SunTrust	53.46%
Morgan Stanley	22.31%	US Bancorp	39.70%

Most banks have had significant rallies into this report so a "sell the news" trade is a very high possibility. The stress tests, intended to bolster confidence in the financial system, have become yet another misstep of the Timothy Geithner Treasury. Geithner has created a great deal of consternation with the development of a test to determine what capital levels are appropriate for key financial companies. In the great words of Kramer, "Well, I have to say this seems capricious and arbitrary". The appropriate level of capital per institution depending on various generalized scenarios of lowered GDP or higher homeowner default rates is incredibly difficult to forecast with any accuracy, if not altogether impossible. Either way, these tests look as if they will contribute to a diverging of the sector, placing the strong and weak in separate, well-defined categories.

The market feels as if it is nearing a short-term top. The tape has become extended and the bid to stocks does not seem quite as strong. Stocks this week seem to have run higher as the last chasers, namely retail money, attempts to jump on the bandwagon at the top. Tomorrow's major news may put the top in this rally.

Market Commentary (May 2009)

Market Analysis:
The market is trekking higher taking out resistance levels as the a rotation into energy and technology provides a strong bid to shares. The six-month trendline was broken at the beginning of April signaling a change in the previous downtrend. A very strong bid has come into the market rallying over 30% off the March 6th lows. The S&P has room to 950 likely intersecting with the 200-day moving average at that area. I would expect a time of consolidation at that level to digest this large move off the lows.
Technology Sector Analysis:
The XLK triggered a long through $16.20 as money rotates into technology. Many technology companies have been weathering this recession well and their future innovation will lead the stock market. The trade is working out well so far moving higher on decent volume. The first target is $18.55 to fill the 10/6/2008 gap. Then, the $20 area will be a good place for some profit-taking.
Energy Sector Analysis:
The OIH triggered the expected long through $88.00 breaking out of its nearly six-month channel base. The lowered volume has made this trade difficult but the pattern has dictated the trade. Stops should be at $80.96 for a maximum 8% loss. The first target is $124.75 to fill the 10/6/2008 gap.
Financial Sector Analysis:
Financial stocks have offered a much larger bounce than I had expected adding fuel to the market's rally. I saw the sector possibly falling out of play and beginning a long-term basing process between $6 and $9. Yet, continued headlines with the government stress tests has kept the sector volatile. The current pattern looks good to go higher in the short-term with $13 likely to be heavy resistance. The news of the stress test will probably create large divergences in the sector and reduce the volality of this basket ETF.

Current Trade: Long OIH

Current Trade: Long OIH @ $88.00 with stop @ $80.96


This trade was difficult to enter aggressively given the lowered volume of the breakout. Yet, the pattern dictated a long entry on 4/16/2009. The trade is working out well, moving higher nicely. We remain cognizant of the low volume.

Trade Rationale 03/22/2009

I see the market as able to gain ground in the longer-term as money rotates into the energy sector. I believe oil will find a strong bid given the falling dollar and the need to invest in inflation hedging commodities. I am looking for the OIH to clear the $88 level breaking out of its 5-month channel base after crushing the index so far this year gaining 5.5% YTD as the Dow has dropped 17.1%. We highlighted these expectations in our recent Market Outlook.

Some Trading Thoughts

Great quote borrowed from Bear Mountain Bull:

"'I think X will happen, so I’m going to do Y'
is totally different than saying
'When I see X happen, then I’m going to do Y.'”

Technical analysis seeks to create profitable if-then chart setups. For example, a bull flag pattern is a pattern of strength indicating increased buying interest. The chart is setup by a large move higher and an upper level consolidation.
This chart is a favorite of many technicians and offers excellent risk-to-reward to traders. Yet, this pattern is not infallible nor does it forecast anything before it triggers. The pattern triggers a long by breaking the upper level of the flag signaling the continuation of trend and traders will enter long positions. Yet, many traders attempt to anticipate the development of this pattern entering positions far too early. Clearly, anticipation and foresight are useful but they must be used wisely and understood as such.

Entering a long prior to a breakout creates many risks. First, the flag may fail, or breakdown. In this case, the buying interest dissipates and the selling overwhelms breaking the pattern to the downside. The trader has now lost by entering a position based on a pattern that never developed. Second, the pattern may draw out over a much longer period of time than desired. Perhaps the stock has a large one-day move higher and then bases for three months at the upper level. Meanwhile, the trader sits in a position entered just a few days after the large move and incurs a large opportunity cost of his capital. During these excessive holding times, the stock may continue making lower lows within the descending channel stopping the trader out or forcing him to hold losses with no defined stop loss.

Anticipation is crucial for the successful technical trader. Yet, too often traders attempt to anticipate the development of a pattern far too early causing entirely unnecessary losses. Remember, technicals create good risk-to-reward if-then setups. Anticipating the formation of a pattern defeats the purpose of the style. Allow the pattern to form before entering. If the move is real, you will not need to be early and will likely lose far more capital being too early rather than initiating when the pattern triggers.

Federal Reserve Balance Sheet

Consolidated Statement of Condition of All Federal Reserve Banks
April 30, 2009
Assets
U.S. Treasury Securities	$ 549,046,000
Agency Debt Securities	$ 68,158,000
Mortgage-Backed Securities	$ 366,153,000
Term Auction Credit	$ 403,573,000
Other Loans	$ 101,531,000
Other Assets	$ 579,688,000
Total Assets	$ 2,068,149,000
Liabilities
Deposits	$ 1,078,143,000
Other Liabilities	$ 943,127,000
Total Liabilities	$ 2,021,270,000
Capital
Total Capital	$ 46,879,000

The table above shows the shocking reality of the bulging Federal Reserve balance sheet. The Federal Reserve currently has a leverage ratio of 44-to-1 as it has put billions of dollars in assets on its books to unfreeze credit markets and fight the global recession. Will foreigners stop funding the U.S. government debt eventually? Will all these toxic assets now shifted to the Fed's balance sheet affect our country's triple-A rating? Only time will tell.