Cain Charges Are Clearly Vague

We all know that Herman Cain is strongly denying the sexual harassment charges written up in the Politico story. And he has said that he was falsely accused while at the National Restaurant Association.

But there’s a sentence in the Politico story that I wanted to point out to everyone. It makes no sense at all: “There were also descriptions of physical gestures that were not overtly sexual but that made women who experienced or witnessed them uncomfortable and that they regarded as improper in a professional relationship.”

What does this mean?

The gestures weren’t overtly sexual, but the women were uncomfortable and believed the gestures were improper in a professional relationship. These are all second-hand testimonies from “close associates” of the women accusers, but I don’t know what standards are being talked about.

I mean, based on this sort of thing, anybody could think anything about almost anything. I’m not blasting the Politico people per se. I just don’t understand the meaning of what they’re reporting.

Basically, if Herman Cain faces new and additional charges, I guess he’s gonna have a big problem. But right now this is just too vague for me. It may well be that it was cheaper to send the women packing with a settlement than go through a long hearing with huge legal fees. I just don’t know.

But with so many of Cain’s fellow board members and co-workers praising him, as Politico reported, I just don’t think there’s much behind this.

Monday Morning Musings

The market is lower this morning after some reverberations spreading through the market after MF Global has moved into a bankruptcy filing. It looks like the trading firm took on some big sovereign debt risks that ultimately turned out bad. Whenever a financial firm is liquidated it can rattle the market, but this should in no way be compared to what happened to Lehman Bros.

In foreign markets, officials in Japan have intervened in the Yen to try to push the currently lower after its recent runup to multi-decade highs. The lower yen is boosting the dollar and weighing on commodity markets. Oil prices are lower near $92.15 and gold prices are also down to $1725.

Earnings season will begin to slow this week, but it was another good showing for corporate profits. It will be interesting to see how 2012 estimates are adjusted in the coming weeks after forward guidance seems to have come in better than many analysts were bracing for.

The 10-year yield is lower to 2.21% after reaching as high as 2.40% last week; as for the VIX, it is +11% higher right now to 27.25, but still nicely below that 30 level.

Trading comment: After last week's outsized rally, capping off an enormous month for the markets, some profit taking today is not surprising. The chart below shows that the S&P 500 rallied all the way up to its overhead 200-day moving average, which is a natural area of resistance. This should be a battleground in the near-term. I would expect there to be some consolidation around this level for a bit. But if the market is able to get back above it, that would continue to put pressure on investors to put risk back on and chase stocks higher.

One-on-One with Charles Dallara

Fresh back from Brussels, former assistant US Treasury Secretary Charles Dallara. He is the managing director for the Institute of International Finance. He was the lead negotiator for the banks and the private creditors regarding the Greek debt.

Do You Believe The European Solution Will Work?

The markets are flying this morning on the news that the EU leaders have agreed to a plan to deal with the debt crisis in the region. Although this deal was for the most part well telegraphed by the market, I think there was still some skepticism that the various parties would agree on all of the various pieces.

As it has been announced, the negotiations on the Greek debt agreed on a 50% haircut, the EFSF stability fund is planned to be able to leverage up to $1.4 trillion, and the banks in Europe will be recapitalized. Of course, there is a lot of skepticism as to how the whole thing will actually be implemented and if it will work long-term, but those aren't today's issues.

Financials here in the U.S. are leading the early action, with the sector fully 4% higher, as the concerns about exposure to European banks dissipates. Corporate earnings have continued to come in better than expected, and investment managers seem to be scrambling to cover short positions and add long exposure as performance anxiety sets in.

Additionally, Q3 GDP came in above expectations at +2.5%. That is both well above last quarter's figure and also makes the debate about recession more of a 2012 issue as opposed to the imminent economic collapse some where predicting.

Asian markets were up sharply overnight, and Europe is nicely higher this morning. It is also a good sign to see CDS prices dropping in Europe. The euro is also higher vs. the dollar, which is boosting commodities. Oil prices are all the way up near $93, gold is up a bit to $1727, and silver and copper are rallying nicely as well.

The 10-year yield has broken above its recent trading range and is at 2.29%; as for the VIX, it fell all the way down to the 25 level, and is currently -13% lower on the day to 25.92.

Trading comment: I admit it hurts not having more long exposure during this record rally we have seen since the Oct. 4th lows. I am glad we didn't press our shorts or add to hedges as we felt a bounce was certainly in order after investor sentiment had reached bearish extremes. The question is what to do now? With earnings holding up, the economy slow but steady, and Europe less bad now that plans are in place, I think everyone will be in dip buying mode. I want to look for stocks that reported good earnings and can play catch-up with the averages, as well as looking for new leadership. The SPX is at resistance at its overhead 200-day average near 1275, so I do expect some consolidation in the markets first, but probably not all that much.

D-WAVE ABORTED

In my last post I hypothesized that the bear market in stocks had finally sunk its teeth into the precious metals sector. I was looking for a final move down into a true D-wave bottom, coupled with the HUI dropping down to test the 200 week moving average. I could not have been more wrong!

Instead gold formed a double bottom at $1600 and yesterday confirmed a trend change to a pattern of higher highs and higher lows.

As is usually the case the miners played follow the leader and reversed their downtrend also.

It is now clear that gold put in an intermediate degree bottom on September 26. The double bottom is a much stronger basing pattern then a V-shaped rebound and should launch a test of the $2000 level at some point during this intermediate cycle.

Is Recession Being Priced Off The Table?

The market opened higher this morning, but quickly turned tail and traded into negative territory. Earnings reports have been mostly positive, with a few negative reactions in the associated stocks. And optimism still seems somewhat lofty that EU leaders will emerge from this summit with some concrete solutions.

In economic news, durable goods for September slid 0.8%, but actually rose +1.7% ex-transportation. That's a fairly good number. Also, new home sales for September also rose more than expected by 5.7%. Recent economic data has not been nearly as soft as the market had been expecting, and it seems that a few weeks ago recession was being fully priced into this market but now is definitely coming into question and at least partly explains the lift we have seen in stock prices.

In earnings news, we are seeing positive action in names like PNRA, ESRX, FFIV, and MHS to name a few. Negative reactions include AGN, LMT, F, and of course AMZN which missed its numbers and is taking it on the chin.

We should hear this morning from EU leaders about the details of their summit. The market is expecting something near a 50% haircut on Greek debt, and word that the EFSF bailout fund can be leveraged up somehow to at least $1 trillion. I don't think we are going to get a firm figure on the size of bank recapitalizations. Investors have been saying that the bank recap figure needs to exceed $100 billion. So depending on how much details we get, we will see if sentiment in the market has become too bullish. I would also not be surprised to see them say that more details will be given in November ahead of the G20 meeting.

The euro is higher today at the expense of the dollar. Commodities are mixed. Oil prices are lower near $91.20, while gold prices have broken out over the $1700 level and are currently around $1718.

The 10-year yield is slightly higher to 2.13%; and the VIX is also higher and still stubbornly above that 30 level (currently 32.68). We still need to see this come down.

Trading comment: Tough juncture as we are somewhat held hostage to political decisions out of Europe. But with solid earnings reports coming in, and economic data this isn't as bad as feared, I still feel like underinvested portfolio managers will look to put money to work and buy dips in the near-term. Barring another shoe to drop in Europe, I would look to add to those stocks that recently reported good earnings and are beginning to break out.

long ESRX, MHS, PNRA

Rick Perry: Flat Tax is 'Tax Cut for Everyone'

GOP presidential candidate Rick Perry, who unveiled his 20 percent flat tax Tuesday, said his economic plan will “lower taxes across the board” and pull back every regulation that has been implemented since the 2008 financial crisis. He also dismissed criticism that it would raise taxes on the middle class.

“This is a tax cut for everyone in this country. Those who want to pick this apart, those that want to play class warfare, that’s their business,” Perry said. “Let’s not get down in the weeds here from the standpoint of going and saying this person over here is going to get a little bit different tax.”

The Texas governor is hoping his “Cut, Balance and Grow” plan will help jump-start his fading presidential campaign. He’s now trailing four other contenders for the 2012 Republican nomination in a new CBS/New York Times poll. He stands at 6 percent, Herman Cain is leading the pack with 25 percent and Mitt Romney is in second place with 21 percent.

His plan calls for a 20 percent flat rate on individual and corporate income and has a $12,500 exemption per person. It will keep deductions for mortgage interest, charitable deductions and local taxes.

“We need to get America working,” Perry said. “We need a president who understands that the way to get this country back on track is by lowering the tax burden and particularly the regulatory climate and that’s what this plan does.”

In fact, he plans on “pulling back every regulation that’s gone into effect since 2008.” He would repeal Dodd Frank, section 404 of the Sarbanes-Oxley Act—which requires companies to provide an auditor's report on the adequacy of their internal controls—and “Obamacare.”

“Let me tell you, if you do just those things, put this flat tax in place and the stock market would go through the roof,” he said. “But more importantly, there are going to be a lot of people who don’t have a job today that will have one.”

Perry also vowed that his economic plan, which cuts government spending and overhauls the Social Security program, will balance the budget by 2020.

And if you don’t like the flat tax, you can stay in the old system, he said.

As for his rivals, Perry dismissed Herman Cain’s 9-9-9 plan, saying the new sales tax “will not happen.” He said Mitt Romney’s economic plan "nibbles around the edges.”

“We need to clearly put in a tax structure that’s flat, that’s simple, that’s fair,” he said.

PORTFOLIO CHANGE

A portfolio changes been made.

Earnings Reactions A Mixed Bag Today

The market is lower in early trading, which shouldn't be much of a surprise given the outsized rally we have seen since the early October lows. There are reports coming out now that leaders in Europe are having some difficulty agreeing on some components of the proposed plan, and we are supposed to hear tomorrow what they have come up with.

Earnings reports continue to roll in, and the reactions in stocks have been a mixed bag this morning.

On the positive side, stocks that are seeing a bounce include: NUS, NOV, COH, BP, UA, COLM, and ILMN.

On the negative side, stocks dropping on earnings reports include: ITW, X, UPS, DB, TROW, CMI, X, and the poster child NFLX. But the most talked about downside guidance is coming from MMM which expects slower growth in 2012 and talked about specific weakness in Europe.

In economic news, the Consumer Confidence number for October dropped more than expected (no surprise) to 39.8 from 45.4 in the prior month. Also, the Case-Shiller Housing Price Index fell -3.8% in August.

Commodities continue to rally, with oil prices now all the way back to $94, and gold inching higher to $1685.

The 10-year yield has eased back to 2.16%; and the VIX has bounced 5% back above the 30 level to 30.75 currently. This is still an elevated level, and really needs to get back down into the 20s before we can expect a noticeable drop in the big market swings of late.

Trading comment: Investors are certainly feeling better after the last week of up days in the market. I sense that a lot of portfolio managers remain underinvested, and will be looking to add to stocks on a pullback. The wildcard of course is that we are still being held hostage to political decisions coming out of Europe about how they are dealing with this debt crisis. But unless there is another big shoe to drop in Europe, I think the market has pretty much priced in a lot of the issues for the near-term, and a continued unwind of investor pessimism should provide some support to the market.

PORTFOLIO CHANGE

Another portfolio change will be made at the open.

Monday Morning Musings

Asian markets surged overnight on optimism that European officials are getting serious enough to come up with large sums aimed at stemming the debt crisis. No official details have been released yet, and there is another meeting taking place this week. But the market seems to be breathing a sigh of relief that they have again successfully kicked the can down the road.

Europe isn't up as much as I would have thought, but is still higher on the day. Economic data there was slightly weak in terms of PMI manufacturing and services readings that were lower in October than September, and also below the key 50 level marking contraction.

Caterpillar (CAT) released better-than-expected earnings this morning, and its stock is up nicely. There were also some M&A items with Cigna (CI) purchasing HealthSpring (HS) and Oracle (ORCL) buying RightNow Tech (RNOW), both for healthy premiums. All sectors are higher so far, led by consumer discretionary and industrials.

The dollar is slightly lower and most commodities are higher. Oil prices are up near $89.90, and gold prices are higher to $1565. Copper is also surging for a second day, up 7% currently.

The 10-year yield is higher to 2.21%; and the VIX is back below the 30 level, down -5% today to 29.66.

Trading comment: The market is overbought short-term, but you have to wonder how much performance anxiety is setting in given how much the markets have rallied since their early October lows. Stories abound that hedge funds are very underweight equities, and you could easily see that push stocks higher as managers chase performance. I know how they feel. Those index etf hedges we own are beginning to be a drag on portfolios, and we will need to reassess their usefulness soon.

PORTFOLIO CHANGE

A portfolio change will be made at the open this morning.

Optimism Running High In Europe Ahead of Big Weekend

The market rallied right at the open after European markets showed signs of optimism that this weekend's European Summit would provide some answers to the debt crisis in the region. There hasn't really been any new comments. In fact, there was a headline that the "situation in Greece has taken a turn for the worse". One has to wonder if expectations have gotten ahead of themselves.

The enthusiasm sure didn't show up in Shanghai overnight. China's market was down for a 5th straight session, and fell to a fresh 2.5-year low. Don't they know the troika is about to solve all our problems?

Earnings reports have been mostly positive also last night and this morning. On the positive side are CMG, MCD (new all-time high), SNDK, and COF. On the negative side is APKT. And on the side of just okay, but not big reactions are SLB, VZ, MSFT, and GE.

The dollar is lower today and commodities are bouncing back. Copper is surging +5%, oil prices are above $88, and gold is higher near $1636.

The 10-year yield is back to the 2.20% level; and the VIX is down -7% this morning, but still at very elevated levels at 32.31.

Trading comment: Some of today's positive open may have been exacerbated by options expiration today. But technically, the S&P 500 has broken above its 8/31 highs at 1230. So for now we have broken out of the trading range to the upside. This is a good sign, but with the market up for nearly 4 weeks straight I think we could get a little pullback next week. Of course, a LOT depends on the news out of Europe. There is a summit over the weekend, and I believe a second summit around Wednesday. We could be setting up for a 'buy the rumor, sell the news' type of reaction also. Overall, if you're looking at adding to longs I think you can wait for a pullback.

long MCD, SH

PORTFOLIO CHANGE

A portfolio change has been posted to the website.

THE LAST SECTOR TO GO

At this point I think it's pretty clear the general stock market is now in the initial phase of a new bear market. It's trying to generate a bear market rally over the last three weeks, but so far it's been pretty weak. That doesn't bode well once the cyclical and secular bear trend resumes.

The HUI mining index is now on the verge of breaking down out of the multi-month  megaphone topping pattern. Once it does that will confirm that the bear now has his teeth in the last holdout sector. The sector that led the bull market over the last 2 1/2 years and now the last sector to succumb to the deflationary forces.

As I have noted in the chart I do expect the miners will find at least temporary support at the 200 week moving average. That should correspond with gold putting in an intermediate degree bottom sometime in the next two or maybe three weeks. Presumably it will come with gold below $1535. My best guess is that gold will make an attempt to test the 75 week moving average at that intermediate bottom.

At that point gold should be severely oversold enough to generate a very powerful, snap back, A-wave rally. That should be followed by a multi-month consolidation as gold works off the huge gains of the last 2 1/2 years. This while the stock market continues down into its final four year cycle low.

I expect the miners will produce a substantial rally off the 200 week moving average also but I'm afraid they will continue to get dragged down by the general bear market in stocks even if gold does form a high-level consolidation over the next year.

So while I expect to see a great buying opportunity on miners in the next few weeks I doubt it will be a long-term type trade. That probably won't occur until the stock market puts in its final four year cycle low sometime in the fall of next year.

Wall Street All-Stars

I'm going to give all my Facebook friends and twitter followers a free six month subscription to WallStreetAllStars.com. Simply go sign up on http://www.WallStreetAllStars.com/ and then shoot an email letting us know you subscribed to support@wallstreetallstars.com and we'll rebate you the $49 monthly fee each and every month for the first six months -- that's worth $300.

The European See-Saw

The market has been up recently on hopes that EU officials are getting their act together to move in a cohesive way and tackle the sovereign debt issues. Now we are getting some news blurbs that officials are having difficulty holding discussions on the EFSF and that there will be no decision on leveraging the fund this weekend.

The disappointment out of Europe seems to be trumping the positive economic reports from this morning like the big improvement in the Philly Fed Index to 8.7 from -17.5 last month. That's a big improvement, and will embolden calls that we are not going to experience a recession. I still think the odds are 50/50.

In earnings news, a few disappointing reactions in the likes of AXP, EBAY, and WYNN. On the positive side, see RVBD and PM.

The dollar is roughly flat today, but most commodities are lower. Oil prices have pulled back to $85.60, and gold prices are lower near $1617. Copper prices are plunging today as well.

The 10-year yield is hovering near 2.14%, and has been steadier in recent days than it has been in weeks. As for the VIX, it continues to climb and is now +6% higher back to 36.43. It is just above its 50-day overhead resistance, so this is an interesting juncture to watch.

Trading comment: The SPX is still holding above the 1200 level, which is short-term support (1190-1200). Bulls are hoping that we can continue to build a base around these levels before a successful push through SPX 1230. A break of SPX 1190 would likely spell another trip to lower levels of the recent trading range. Tough to gauge, as the market is very news driven by each headline out of Europe. We are staying defensive and maintaining our etf hedges.

long SH, PM

Earnings Reports Mostly Positive

The market is mixed in early trading, with Apple's results weighing on the Nasdaq, but the other major indexes pulling into positive territory.

AAPL dipped below the $400 level this morning, but is holding above there as of this post. The company missed EPS estimates for the first time since 2004. But they also raised guidance for next quarter, which is an equally rare occurrence for the company. And despite the weak iPhone number, gross margins were very solid.

I think for a company that has executed as flawlessly as Apple, investors should be willing to give them the benefit of the doubt and see if it was just a one-quarter blip. I expect them to have a very strong fall quarter, and am not selling any of our shares at this juncture.

Other strong stock reactions to earnings reports include ISRG, INTC, and ABT to name a few. Despite a few outliers, I think the net reactions to earnings season thus far have been fairly positive and I'm interested to see how S&P profit projections hold up once we get through the rest of the reports.

Asian markets were higher overnight, and Europe is higher this morning. The tone in Europe is improved despite Moody's downgrading Spain's debt rating. This wasn't a big surprise, but it is interesting to see that CDS spreads in Europe are improved today.

The dollar is flattish today, and commodities are mixed. Oil prices are higher again to $89.40 and gold prices are up slightly near $1657.

The 10-year yield is higher this morning near 2.18%; and the VIX remains interesting in that it cannot get below that 30 level folks are watching. Today it is actually higher to 32.66. Those sustained elevated levels in the VIX mean that traders are still expecting more swings in the market.

Trading comment: The market recouped Friday's losses yesterday and then some. The price action certainly feels good, and the indexes have indeed held above their 50-day averages thus far. Earnings season remains a wild card for individual stocks, but those companies that report good earnings I think can be bought for more upside in Q4. The market may be overbought in the short-term, but there is still considerable bearish sentiment that has built up and could help offer support under this market.

long AAPL

What Needs to Happen in Europe

The fear level in the market is so high right now that there has to be some solution to the greater problems before we can start to look at bank stocks on a fundamental basis, Rochdale Securities’ Dick Bove said in an interview on The Kudlow Report.

Stocks suffered their worst loss in two weeks on Monday after comments from Germany's finance minister caused investors to fear Europe's solution to its debt crisis may not come fast enough.

The solution, Bove said, starts with the recapitalization of European banks.

“The problem is you cannot resolve the Greek problem without debt forgiveness and you can’t give Greece debt forgiveness unless you allow the banks to writedown the Greek debt,” he said. “And you can’t allow the writedown of the Greek debt until you get equity capitalization of those banks.”

And that equity recapitalization has to come from the private sector, he added.

“I’m taking about the private sector putting the money into those banks to rebuild the capital similar to what happened in the United States in the last crisis here in 2008 and similar to happened in the United States in the late 1980s, early 1990s,” Bove said.

Once that debt forgiveness happens, he said, the Europeans can start to rebuild their economies.

Monday Morning Musings

The markets are lower in early trading following last week's outsized 6% rally. That was the best weekly showing in more than two years. So it's normal to see a pullback following such strong price action. What the bulls hope for is just some quiet consolidation, without too much distribution.

Earnings season continues to heat up. This morning Citi (C) and Wells Fargo (WFC) both reported earnings, with the former beating estimates but the latter coming up a little shy. WFC is down 5% on its miss, and weighing on the financial sector. Halliburton (HAL) also beat estimates, but it looks like some serious profit taking there after a nice run into its earnings report. Apple (AAPL) reports this week, and is breaking out to new all-time highs ahead of its report.

Asian markets were higher overnight, and Europe was higher this morning after a G20 meeting this weekend. Leaders were pressed to come up with some sort of resolution within a week. I'm glad to see they're getting serious, but I am a little wary that expectations may be getting ahead of themselves.

The dollar is higher this morning, while commodities are mixed. Oil prices have eased back slightly to $86.40, while gold prices are firm near $1686.

The 10-year is lower today at 2.18%; and the VIX has really spiked higher already this morning, up nearly 13% back to the 31.85 level. This is an interesting development after last week's drop in the VIX below the 30 level. I think it shows traders are still jittery.

Trading comment: This is a tough juncture to consider new long positions right here. First you have the big rally from last week that will likely see some consolidation at the least, as well as profit taking. You also have earnings reports to deal with. And the action in WFC and HAL show the action following earnings reports can be unpredictable. That said, I expect AAPL to have a positive reaction to what I think will be very strong earnings again.

long AAPL, HAL, WFC

THE MOST IMPORTANT DECISION BERNANKE WILL EVER MAKE

As many of you know who have read my work in the past, the dollar put in a major three year cycle low back in May. It has been my expectation all along that the rally out of that major bottom would coincide with another deflationary period and the next leg down in the stock secular bear market. So far this has been the case as stocks topped in May at the same time the dollar bottomed. 

After a 15 week consolidation the dollar has initiated its first powerful thrust up out of that major bottom. As you can see in the chart below the rally out of a three year cycle low generally lasts at least a year and turns the 200 day moving average back up.

I've also noted that once the rally out of a three year cycle low rises above the 200 day moving average, it shouldn't dip back below that level, at least not for the next year to year and a half.

Sometime in the next few days the dollar will put in a daily cycle low and bounce. My expectation is that it will either bounce off of the 200 day moving average or bottom slightly above that level. It's what comes next after that bounce that is absolutely critical.

Bernanke is now about to make the most important decision of his life. The correct decision is to allow the dollar to appreciate, which in turn would continue to drive the stock market down into its next four year cycle low in the fall of 2012, and would  facilitate a much-needed recession to cleanse at least some of the massive debt that has been accumulated in the last two years. That is the correct decision. It is also a very hard decision because it will lead to severe short-term pain and undoubtedly another depression on the same scale as 1932.

However if Bernanke chooses to kick the can down the road again and continues his failed policy of monetary debasement then  the dollar is at great risk of forming an extreme left translated three year cycle.

For those of you that are new to cycles analysis, a left translated cycle is generally associated with a bear market. Left translated means that the cycle tops in the front half of its cycle timing band. In this case any top that forms prior to 18 months would signal a left translated three year cycle. Furthermore the more extreme translated a cycle is the more severe the decline tends to be, simply because the cycle has a lot more time to move lower.

If Bernanke decides to avoid short-term pain and kicks the can down the road again with further currency debasement, then the dollar is at great risk of having already put in the top of this three year cycle.

The unintended consequences of a three year cycle that tops in only four months are, to put it mildly, horrendous. That would indicate that the dollar is going to head generally lower for the next three years culminating in a hyper-inflationary event at the next three year cycle low in 2014.

The next couple of weeks and months are going to be of grave importance. The dollar needs to find support at the 200 day moving average and resume moving strongly higher. That would of course put pressure on the stock market and probably terminate the current bear market rally somewhere around the 200 day moving average (roughly SPX 1270ish) before the next leg down begins.

If however the bounce out of the now due daily cycle low is weak and the dollar rolls over quickly and moves back below the 200 day moving average then all bets are off. Stocks could even rally back to marginal new highs. However that would also guarantee that the CRB has put in its three year cycle low and we are now at the very beginning of an inflationary Holocaust.

If Bernanke makes the wrong decision then gold is on the verge of moving into the bubble phase of the secular bull market. That being said gold should still experience one more move down in the next couple of weeks as the dollar rallies out of its impending daily cycle low. After that, everything hinges on Bernanke's decision whether or not to continue his failed monetary policies.

Financials Lag Early Rally

The markets are higher again in early trading on the heels of improved sentiment in Europe and a blowout earnings report from Google (GOOG).

Treasury Secretary Geithner made a lot of comments about Europe and tried to instill some confidence. He said they will continue to pressure Euro leaders to act decisively, and also said that the IMF has considerable resources that have yet to be deployed. That hints at his relationship with Christine Lagard, who is in Geithner's camp that more needs to be done.

The positive action in Europe this morning bucked the weakness in Asian markets overnight, and also ignored the downgrade of Spanish debt by Fitch.

In the U.S., stocks are rallying following Europe strength and the strong results from GOOG. Additionally, the retail sales report from September came in stronger-than-expected at +1.1%.

The financials are the biggest laggards this morning after Fitch placed several large financials on its Negative Watch list.

The dollar is weaker so far as the euro bounces, which is boosting commodities. Oil prices are higher to $86.40, while gold prices are trying to lift above $1675.

The 10-year yield continues to bounce, now back to 2.25%. And lo and behold but the VIX has finally broken below that psychological 30 level, although just barely. It is currently trading near 29.80 after getting as low as 28.25 after the open.

Trading comment: The price action has been solid all week, but the leadership in the market is lagging. I just don't see a lot of quality growth stocks breaking out. So I have yet to get a lot more bullish, and at this point am still in the camp that this is an oversold market rally that is normal after seeing investor sentiment reach extreme bearish levels. I could be wrong, but it would take continued constructive action in the market combined with some real tangible solutions out of Europe that I have yet to see. At this point there is a lot more talk than action going on across the pond.

long GOOG, SKF

One-on-One with Governor Rick Perry

I had the pleasure of interviewing Gov. Rick Perry last night on The Kudlow Report. The GOP presidential hopeful said he wants to dramatically increase oil and gas exploration and in the process create more than a million jobs.

THE BIG PICTURE

More often than not we as investors get caught up in the day-to-day action and never take the time to step back and look at the big picture. Today I'm just going to post some long term charts with appropriate annotations.

THE LIGHT AT THE END OF THE TUNNEL.

Market Overbought And At Resistance

The market is lower in early trading after a very nice rally. People often like to look at how much the market bounced from its recent lows. The SPX traded down to 1075 last week and bounced as high as 1220. That makes for a solid 13% bounce. Although if you were good enough to buy those lows and sold the highs yesterday, I have a job for you at our shop.

Bulls were hoping for some good news from JPM this morning, and they were able to top consensus estimates. But the cautious tone from management is not helping the stock, which is currently -5% lower and weighing on the financial sector which is the biggest laggard this morning.

Tech is bucking the weakness and the NDX is just barely positive as of this post. Google (GOOG) shares are higher going into tonight's earnings report. I'm sure GOOG will be able to post a little upside, but the stock reaction will be any ones guess. Also, GOOG management sometimes spends money on non-core things, so we will have to see how tight they were with their expenses. That's one thing that bothers me a bit about their management.

Asian markets were higher overnight, but Europe is down this morning. The euro is also lower while the dollar is higher. That is weighing on the commodity index. Oil prices have fallen back to $84, while gold prices are also lower around $1661.

The 10-year yield got a big bounce yesterday, but is giving some back today trading near 2.15%. As for the VIX, it almost got below the 30 level yesterday, but then bounced higher and is currently up +4% today to 32.54.

Trading comment: After being up big the last 6 out of 7 days, the market is short-term overbought and in need of at least some consolidation. Also, the major indexes have run into their former resistance levels near SPX 1220 and Nazz 2600. For the bulls, two things need to occur from here. The indexes need to hold above their 50-day averages, and these major support levels need to be broken. That could signal more upside is possible. But don't forget the list of stocks breaking out is not exactly bountiful. It is mostly utilities and defensive type stocks, not your typical quality growth names. So take the constructive action with a grain of salt, imo.

long GOOG, JPM

Earnings Season Starts On A Positive Note

The markets are higher again in early trading. If the market closes positive today, it would be the 6th day of gains in the last 7 sessions. For its part, the S&P 500 is running into resistance levels around the 1220 area that have halted the last few rallies.

Asia was mixed overnight, with some floods in Thailand that closed factories. But China was able to bounce +3.1%. Europe is higher this morning on optimism that Slovakia will pass the EFSF plan after it was voted down yesterday.

The euro is also getting a bounce on the news, pressuring the dollar. Commodities are higher across the board, led by copper (+3.5%). Gold prices are rallying back to $1680, while oil prices are roughly flat near $85.75.

In earnings news, although Alcoa (AA) reported a miss its stock is only down slightly. But Pepsico (PEP) and Infosys (INFY) both reported solid results and their stocks are up nicely. INFY's earnings is also boosting one of our holdings that I like best in the space, Cognizant Tech (CTSH). From this point, earnings season will continue to heat up, but at least its getting off to a solid start.

The 10-year yield is also getting a nice lift higher as recession fears are moving to the back burner, at least for the time being. Today the yield is all the way back to 2.21%.

As for the VIX, it is down -7.7% currently and knocking on the door - or I should say the floor - of that 30 level that I have been talking about. A break below this level would be a good sign for the bulls.

Trading comment: With the market rallying 6 of the last 7 days, we are no longer oversold and are short-term overbought. So I don't want to chase anything here, and I think it is likely we will see some consolidation in the near-term. The key for the major indexes will be that they hold their 50-day averages on any pullback. Those 50-day averages have been acting as resistance for the last few months, and if we can convert that resistance into support it would be another bullish sign for the market.

long CTSH

Dexia and the European Wake-up

Yesterday’s massive 330-point stock market rally was generally linked to an expected Merkel-Sarkozy summit in a couple of weeks to nail down a new European rescue plan for bad government debt and troubled banks. But I think the more immediate cause of yesterday’s rally was the news that European leaders are rescuing the underwater bank Dexia. This bank-rescue mission looks to me like a new model to save all the European banks from the risk of catastrophic meltdown and contagion.

There are some key principles in the rescue -- nationalization, good-bank/bad-bank breakup, asset sales, and long-term guarantees of bank deposits and liabilities -- that could make Dexia a seminal event if it is saved. And it appears as though the authorities are road-testing the rescue as a model for bigger banks that may be in deeper trouble.

I am especially interested in the deposit and liability guarantees. I think these will be part of a big Euro-TARP capital-injection program based on the EFSF rescue fund of the ECB and IMF. In other words, like the FDIC, Treasury, and Fed guarantees of all bank and money-market funds in late 2008, the Europeans may do likewise as Greece defaults. The rescue funds will then support the banks, probably inject some debt capital or preferred shares, and then with those guarantees have the banks raise private-equity capital in the marketplace as soon as possible.

Dexia looks to me like the first example of the European wake-up. As such, it triggered a big bank-stock rally which led to the overall market rise.

One thing I don’t favor is a bailout of the sovereign countries. Greece should default, at least in a structured way, with large bond haircuts. Portugal, Italy -- they should not be bailed out. But the banks will have to be bailed out, as distasteful as that may be, in order to avoid a global catastrophe.

This is where the troika support is necessary, and the principle of guaranteeing all deposits and liabilities will be very helpful.

A final thought: I am persuaded that the ECB should cut rates and move to quantitative easing as part of the solution to the deep financial stresses that are pulling down the European economy. And I have a sneaking suspicion that Ben Bernanke will move to QE if the ECB does, even though it hasn’t worked up to now. Maybe this talk of pouring in money to raise nominal GDP will be the Fed’s new raison d’être.

But if the ECB runs a big QE to pump in liquidity (following the Bank of England), then the dollar is going to keep shooting up, imparting deflationary pressures on the U.S. economy that we cannot afford.

Whether Bernanke thinks in these terms remains to be seen.

THE 75 WEEK CEILING

The 75 week moving average has been a very clear dividing line between bull and bear markets for the last couple of decades.

The S&P is on the verge of running in to that roadblock soon.

It's possible that the S&P could penetrate this level briefly, and possibly even rally back to the 200 day moving average (about 1250) before the bear market resumes. That being said I doubt the market will be able to penetrate this major resistance level on the first try, and it may even end up capping this bear market rally.

We already have three warning signs that popped up today that should make bulls wary. More in tonight's report...

Bond Yields Lift From Very Low Levels

The market opened under a bit of profit taking this morning, but has reversed its early losses and is trading higher for the time being.

Asian markets joined the party and rallied overnight, led by Hong Kong. Interestingly, China lagged again and was only able to muster a 0.1% gain. Europe is lower this morning after a decision by the Troika to give Greece its next tranche of aid. Investors in the region feel that this will do little fix the longer-term problems of the country. As for news, we are waiting to here if the EFSF is ratified in Slovakia which is voting on it now.

Our financial sector is awaiting details from the Volker Rule, which is currently under a comment period. Banks stocks are mostly higher today, although tech stocks are leading the early action.

The dollar is getting a little bounce this morning, while most commodities are lower. Oil prices are down near $85.10, and gold prices are slightly lower to $1667.

The VIX isn't falling today, and is hovering near the 33.25 level. Yesterday it broke below its 50-day average for the first time in months, which is a good sign. But I would have thought if traders really think the market has more upside in store that it would have moved even lower. I would like to see it get below the 30 level to signal an expected decrease in all of this volatility that we have seen.

As for the 10-year yield, the bond market was closed yesterday but yields are on the rise today. You can see below that the yield on the 10-yr. is breaking above its 50-day average. While higher bond yields are not theoretically good for the market, I like to see the 10-yr lift a little from its recent depressing levels simply to signify that the economy isn't about to fall off a cliff.

Trading comment: We sold some of our trading index shorts yesterday as the market appeared to break out of its slump. Investor sentiment has become extremely bearish, with many of the indicators we follow at levels not seen since 2008. Even though I don't think we have seen the ultimate lows in the market for this cycle, I am aware of the fact that there can be interim trading rallies along the way. If we don't get hit with further unexpected bad news out of Europe, and no big earnings disappointments, I could see this market continue to lift a little higher while some of the recent bearish sentiment gets unwound. Stick and move, baby.

PORTFOLIO CHANGE

A portfolio change has been posted to the website.

Monday Morning Musings

After a 2% weekly gain last week, the markets are up sharply in early trading this morning. The news over the weekend was that both Merkel and Sarkozy have committed to supporting the region's banking system through some sort of recapitalization plan to be unveiled in a few weeks.

Although Asia's markets were roughly flat overnight, Europe is rallying this morning. The euro is also getting a boost at the expense of the dollar. China was closed all last week for holidays and re-opened with a -0.6% loss last night.

Commodities are rallying, with gold prices higher to $1667 and oil prices up near $86.

All 10 S&P sectors are higher today, led by energy and financials. Defensive sectors like consumer staples and utilities are lagging.

The bond market is closed for Columbus Day today.

Trading comment: A notable development on the technical front is the S&P 500 breaking above its overhead 50-day average for the first time since July. Lots of traders like to lean short on stocks when the market is below this key moving average. While one day doesn't necessarily change the trend, it is a good start. And a couple consecutive closes above the 50-day could spur additional short-covering. The SPX has been down for 5 straight months, so a relief rally certainly isn't out of the question.

Earnings season will start to pick up soon, and will be a key ingredient. Stocks have already priced in a lot of negativity, and in my opinion have priced in a decline in corporate profits going forward. If we can get some solid reports and forward guidance from managements that is less bearish than many already fear, I think that could be enough to add to this nascent rally.

still long SH

The Tea Party and Gandhi

 I've been in Moab the past couple weeks.  
Again, I'm departing from my usual blogging to talk about the world scene and what we can do or not do.

Operation Non-Cooperation-With-Deception

A few blogs ago I posted an "Operation Bank Bust", which turned off some people.  I should have instead renamed it "Operation Non-Cooperation-With-Deception":

On November 5th, 2011, people are encouraged to remove their funds from their bank, close any accounts and throw away credit cards (cut them up first) in order to promote personal independence from the banking system.

In the Spirit of Gandhi, I can say with full certainty that the problem of Wall Street will never, ever end until we stop doing business with Wall Street.  Stop cooperating with anything that we see as evil, both for individual conscience and the health of the whole world.

We must get out of victim mentality and realize the power is in our hands to be free, not in the hands of the banks and corporations.

It's not a fight against anything.  It's a simple refusal to cooperate with what we know to be deceptive and destructive.

Wall Street Occupation

You've likely heard about the Wall Street Occupation by now.  The mainstream media, for some "mysterious" reason, was not reporting it until recently, now that nobody can help not notice it.  

Some have criticized the Wall Street Occupation for not having a specific demand.  But the idea of it is not necessarily calling for reformation of Wall Street - but to draw attention to the total insanity of our banking and corporate system  (Here's Occupy Wall Street's One Demand: Sanity).

What I don't get is that somebody (the corporate media?) is always trying to paint the picture as a battle between Right and Left.  And the Right thinks the media is controlled by the Left, and the Left thinks it's controlled by the Right.  Funny, huh?  But, last I checked, thinkers on both the Right and the Left are coming to the same conclusion: the banking industry has hijacked the economy and to bail it out is criminal.  And, last I checked, non-thinkers on both the Right and the Left don't see that free trade agreements pushed strongly by both democratic and republican presidents have sent production of goods oversees, tanking our economy.  In addition, this has created unbridled multinational corporations outside our borders that don't have to abide by any labor laws or ethics.  Notice how both Republican and Democratic politicians go hush, hush in full agreement, when the Federal Reserve chairman speaks, or when somebody talks about the "need" for more international "free trade."

Can Somebody Tell Me What This "Tea Party" Is?

Maybe I'm an ignoramus, but I can't figure out what the "Tea Party" really is, and it appears people claiming to be Tea Partiers are just as clueless as I.

But let's look at its namesake, the Boston Tea Party, which sparked off the American Revolution, breaking the American colonies' yoke from Britain.

We read in school history books that, on December 16, 1773, American colonists didn't want to pay taxes to Britain, so they trespassed onto three ships and dumped British tea into the harbor. 

But do we ever think what this means?  We don't stop to ponder that this wasn't so much a breaking off from the nation of Britain but the breaking off from the control a multinational corporation, called the East India Company.  The multinational corporation and the nation of Britain had become so intertwined that Britain had become the multinational corporation and vise versa. 

Refusal to do business with the multinational corporation was the birth of the USA.

Now, let's bump ahead a few years to Gandhi (The Struggle For Indian Independence).  A replay of the same game!  India wanted independence from this same British multinational corporation.  Gandhi led the Indians to not use and/or to burn goods from this British multinational Corporation: namely, he led movements to burn British textiles and to have Indians weave their own cloth and produce their own salt. 

This same principle gained both the independence of America and of India.

The Boston Tea Party and Gandhi's Moral of the Story:  Stop Business With Multinational Corporations and Produce Locally 

We see by two examples that it works.  Non-cooperation with what you believe to be evil is the only way to be free from it.  Gandhi 101.  The power to do good is in our hands, not in the hands of banks and corporations.  They cannot be reformed.

All the protests in the world against banks and corporations aren't going to do an iota of good if we do any kind of business with banks and corporations.  All our talk of freedom is nonsense if we do business with them. 

Now we see the same pattern in the USA as happened to Britain way back when.  It has become so intertwined with multinational corporations that the USA has become a multinational corporation, doing to the rest of the world what Britain did to the American colonies and to India.

Will the real Tea Partiers please stand up?

Now what do you think?  Are the"Tea Partiers" true Tea Partiers?  Would they or would they not consider cutting off all business to banks and multinational corporations, including throwing corporate goods into a bonfire?  We know by example of both the Boston Tea Party and Gandhi's movement that this is the only way independence can come.  Would the "Tea Partiers" consider it an act of terrorism to destroy corporate goods?  Did or did not both the Boston Tea Partiers and Gandhi destroy corporate property? Go ahead, challenge the Sarah Palins, Glenn Becks, and Michelle Bachmanns on this.  To whom are their ultimate loyalties, corporations or people?  Will the real Tea Partiers please stand up?

Both thinkers on the Right and on the Left are coming to these same conclusions.  But somebody is letting labels divide. 



See also on the website: 
Is Banking Criminal? What the World's Ancient Philosophers & Religions Say

GOLD AT A MAJOR CROSSROADS

I think next week will mark a major turning point in the gold market. Depending on whether the dollar continues higher or turns back down we will either see a resumption of the D-Wave decline or this will just turn into a normal run-of-the-mill intermediate degree correction followed by another leg up in this 2 1/2 year C-wave advance.

First the pros:
The COT report has now reached a maximum bullish level on the commercial contracts. In the past this has always marked major bottom turning points.

Sentiment & breadth have reached extreme bearish levels (contrary indicator).

Chart courtesy of sentimentrader.com

It's possible that gold has formed a small T-1 continuation pattern (A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected.)

There is a small problem with this interpretation as the second leg of a T-1 pattern is generally slightly smaller than the first leg.

The cons:

The current intermediate cycle is too short. Barring a shortened cycle, which does occur rarely, there should be one more leg down into the normal timing band for an intermediate degree cycle bottom (20-25 weeks).

Also the HUI mining index is potentially forming a megaphone topping pattern. If gold does have one more move down into a true D-Wave bottom then the bounce off the lower trend line should fail followed by one more aggressive move lower.

Also there is a much larger T-1 pattern in play that fits the normal parameters much better than the smaller version.

You can see from the chart above that unlike the smaller T-1 the larger version does feature a second leg slightly smaller than the first, and if this pattern is playing out then we need one more move lower to test the midpoint consolidation zone.

Right now the battle is being fought at the $1600 level. So far every time gold reaches that level buyers step in. 

If however gold closes below $1600 that would be a serious warning sign that the current daily cycle will be left translated and that gold is indeed caught in a true D-Wave decline. If that's the case it still needs to test the consolidation zone of the large T-1 pattern and the intermediate degree cycle will bottom in the normal timing band (November). If this scenario unfolds then we can look for an A-wave advance to begin once that final D-Wave bottom is in place.

As I have noted before A-waves usually test but fail to exceed the prior C wave top. They are almost always followed by a lengthy 1-1 1/2 year consolidation before the next leg up can begin.

In my opinion next week is going to be critical. Either the current daily cycle is going to break down below $1600 in a left translated manner, in which case we will probably see gold continue sharply lower to test the 75 week moving average and the consolidation zone of the large T-1 pattern. Or if gold can gain some traction and breakout of the recent trading range to the upside then the smaller T-1 pattern comes in to play and we should see gold make another run at $2000.