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10282009 May 25, 2010

Posted by easterntiger in Uncategorized.
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Weather Report 10282009

Current Positions  (Changes)

I(Intl) – exit; S(Small Cap) – exit; C(S&P) – exit ; F(bonds) up to 25%;  G(money market) – remainder

Weekly Momentum Indicator (WMI***) – last 4 weeks – last 4 weeks, thru 10/28 – -+2.57, +17.04, +23.16, -9.3

The Confidence Game is running on empty.

Keeping the markets floating, while making you wish that you’d taken the risk and been further invested this year, is all about giving you the ‘confidence’ to spend and take other risks, until the rest of the pieces are gradually put in place to actually build a real recovery, as opposed to the contrived one we’ve had so far.  Your faith = their gain.

Market Position – Much press has been given to the 60% gains in the indexes since the March low.  Similarly, over the last two decades, Japan had four rallies of 50% or greater, yet the Nikkei  is still 75% off its 1989 peak.  More recently, over the past 6 weeks or so, the S&P500 has exceeded 120% its 200dma (daily moving average) on 10 separate trading days, and exceeded 118% on 25 days (out of 36 total)!  To see this gigantic index stretch 20% higher than its 200dma at all, let alone for so long, is mind-boggling. During the last cyclical bull ending in late 2007, the S&P500 seldom climbed above 107% its 200dma. Even in a strong bull, 120% is crazy.   In other words, the upward ‘stretch’ being applied to the current market environment is quite amazing, and most certainly, not long to last, at least without some penalty to pay at some point.   After the extended run so far, flat to downward momentum is much more likely ahead than in recent months, even in the unlikely event of a bounce emerging just ahead.

Every peak since July has been with successively falling strength, or falling tops as it’s called.

At under 1100, the S&P500 is still trading at a 2004 level .  Yet the US economy, even across the stock panic of ‘08, is still over 20% larger than it was 5 years ago.  This cyclical bull, if fed with enough artificial stimulation, could have plenty of room to run.    But, with the Fed having to step in to buy more and more of our own bonds at auction, to replace the reduction in foreign buying, that’s not likely.

Broader Economic Issues – Nobel Prize-winning economist Joseph Stiglitz said unemployment is going to keep rising and should be the main focus for policy makers, and that gains in the stock market indicate investors have been “irrationally exuberant” about a recovery. “There’s a lot of risk going ahead of some big bumps,” he said in a Bloomberg Television interview from Istanbul, citing housing, commercial real estate and consumers’ inability to pay off credit cards because of job losses. “There’s a very big risk that markets have been irrationally exuberant.”  And, unfortunately, U.S. banks are reducing their lending at the fastest rate on record, tightening the credit squeeze and threatening to leave many otherwise viable businesses unable to borrow money to expand their businesses, meet their payroll or refinance their maturing debts. According to weekly figures provided by the Federal Reserve, total loans at commercial banks have fallen at a 19% annual rate over the past three months, while loans to businesses have dropped at a 28% annualized pace.  There are still a long list of unfavorable aspects of which to be wary, including dramatic losses in wealth, the jobless recovery, consumer spending attitudes, the continuing credit crunch, weak business spending, and the waning impact of Fed and government stimulus.

Opportunities  – Even with gold’s rally to a record, prices are still 53 percent below the 1980 inflation-adjusted peak. While gold rose 19 percent this year to $1,072 an ounce on Oct. 14, consumer prices almost tripled in the past three decades, eroding the metal’s value. Bullion hasn’t kept pace with the cost of bread, fuel or medical care. In 1980, gold hit a then-record $873 an ounce. In today’s dollars, that would be $2,287, according to the U.S. Labor Department’s inflation calculator.   So, technically, today’s gold highs are less than half of the inflation-adjusted records.  Even more favorably, silver has rallied even further by comparison and actually has more favorable characteristics, given the approaching contention between falling supplies and increasing demand.  Gold is bought and stored, while silver is bought, stored AND consumed for industrial purposes.  As volatility is normal in metals and other commodities, a strong pullback to near $925/oz on gold and $14/oz for silver could be underway.  Both have established targets to break recent high levels in the not too distant future (2010).

***The Weekly Momentum Indicator is a strength measure of the S&P100, the largest 100 stocks in the U. S., in terms of market capitalization (share price of each of the 100 stocks times the number of shares available to the public).  The WMI is the difference in the S&P100 average opening price for each of the past three Monday mornings and the average closing price for each of the past three Friday afternoons.  This detects upward, sideways or downward movement of the overall market, since the markets generally move in synch from one index to another, and correlates very well with identifying opportunities for reward/gain and for situations for risk/loss in all equity indexes.  Rising numbers from the prior week are positive opportunities, while falling numbers from the prior week are avoidance opportunities.  I have a weekly, ten year history for this indicator at the time of update in this report (10/28/2009).***
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