China Cuts Rates Again

The market is higher in early trading, adding to yesterday's outsized gains.  The S&P 500 got as high as 1329 this morning before running out of steam.  Last week's high was 1335, so we see where near-term resistance is for the time being.

Overnight China cuts its benchmark rate another 25 basis points to 3.25%.  That follows a rate cut yesterday by the Reserve Bank of Australia.  The Bank of England stood pat at its current rate of 0.5%, half that of the ECB's 1.0% level.  I still think the ECB should have cut rates, but maybe they are trying to save some ammo.

Asian markets rallied overnight on the news of the Chinese rate cut and also in response to the rally here in the U.S.  Europe's markets are higher again this morning on continued optimism that Europe's leaders will come up with some solutions to address Spain.

Our markets lost some of their early steam after remarks from Bernanke were released.  He said that our banks have improved their strength, that inflation remains contained, but that the fiscal cliff looms large as a significant threat to the fledgling recovery.  He is now getting grilled by Congress, which is always comical due to their lack of true understanding of complicated monetary policy.

Outside of the above, there is little in the way of market moving economic data or corporate news.  On report of note was LULU's earnings, which were okay but the company reduced guidance which is the kiss of death for a growth stock.  The stock is currently down -9% on big volume and weighing on other growth retailers. 

The dollar is slightly higher this morning as the euro takes a breath after yesterday's spike.  That has commodities mixed.  Gold is easing back to $1609 while oil prices are higher near $86.10.

The 10-year yield has had a nice bounce from last week's lows.  It got back to 1.65% today and is currently just below those levels.  As for the VIX, it plunged yesterday and was down further this morning to 20.75 before bouncing.  It is currently up on the day near 22.43.  I don't see it getting below 20 and staying there on this rally.

Trading comment: I have been talking about how investor sentiment had gotten very bearish and that was likely setting us up for a bounce.  We have certainly seen that bounce with a nearly 5% move in the SPX from Monday's lows to this morning's highs.  That puts the market at an interesting juncture here.  I think if the market can digest this recent bounce without giving too much of it back, it is possible to see another push higher for the major indexes.  But of course, a lot will have to do with the fluid situation in Europe.  Greece's elections are June 17th, and the financials markets and European leaders will be anxiously awaiting those results.  We are still more in defensive mode than aggressive, and we have used this recent strength to add to some of our ETF hedges.

One-on-One with Jeb Bush

Former Florida Governor Jeb Bush on Wednesday hailed the outcome of the Wisconsin recall election, praising Governor Scott Walker for emboldening conservatives in their drive to slash spending on a national level.


“He’s a courageous leader, and he was rewarded for courage,” Bush said on CNBC’s “The Kudlow Report.”

“In a world of dysfunction, it’s really good that a guy like that, who had the courage of his convictions and acted on them, is rewarded with a victory. I don’t even know why we had the recall to begin with, but if there was to be one, better to win by a bigger margin than he won in 2010, with a higher turnout. I think it’s a leading indicator of one thing, which is the intensity of the conservative side of politics is now stronger than the liberal side.”

The prediction might be partly wishful thinking.

In an exit poll of Wisconsin voters by ABC News, a majority — 51 percent to 44 percent — said they would support President Obama over Republican challenger Mitt Romney if the election were held that day.

Voters also picked Obama over Romney, 42 percent to 38 percent, to do a better job handling the economy, as well as by 46 percent to 37 percent on “helping the middle class.”

Bush said the recall election results — which Walker won with 53 percent of the vote to Democrat Tom Barrett’s 46 percent — represented a “spanking” for unions.

“It’s a spanking because they made it that way,” he said. “They raised the stakes, they made this a national campaign. All of the leadership, Debbie Wasserman Schultz of the Democratic Party and the union leaders all said that all roads lead through Madison, basically as it relates to the national campaign. This was a national statement.”

Walker’s victory, Bush said, also meant the Tea Party movement was alive and well.

“They play a huge role in reminding people we’re on an unsustainable course when it comes to spending at every level, and Scott Walker takes the general belief and does something really novel; he acted on it,” he said.

Bush reiterated that the United States government was on an “unsustainable course.”

“The only reason we’ve been allowed to stay on the course is a monetary policy of zero percent interest rates and the fact that Europe has bigger problems than we do, so... we’re slightly larger than the next midget, basically,” he said.

Creating 40 cents of debt for every dollar of federal spending, Bush added, was “not sustainable.”

“Never in anybody’s wildest dreams could anybody say that this is sustainable, so it seems to me that if you could — if you’re in a position of leadership, you have to find creative ways to find common ground, maybe through the tax code, maybe looking at exemptions,” he said.

Bush took a shot at cutting entitlement programs — Medicare and Social Security — though not by name.

“If you could get a cap on entitlement spending in the out years, you are going to save trillions of dollars, not billions of dollars, and in order to bring people along, are you going to have to look at the tax code,” he said. “And so, dealing with exemptions in some way that might satisfy the left to deal with the unsustainable entitlement problems we face. I don’t know what the exact deal would be, but Chris Christie is right about one thing, it requires leadership.”

Bush also criticized Obama for “dividing” instead of finding “common ground,” while defending his brother, former President George W. Bush.

“You’re in the fourth year of your presidency, it becomes unbecoming to constantly be blaming the past for your failures,” he said. “And it’s just not — I don't think politically — helpful to do that. And so, yeah, I mean, I think my brother gets a bum rap, but that’s just the way it is.”

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Scheduling Conflict

I have a meeting this morning, so look for my market comments after the close of trading today--

Should The ECB Cut Rates?

The market is slightly higher in early trading, but the S&P 500 is still not back above its 200-day average.  The 200-day resides near 1285.  The SPX briefly bumped its head at 1285 this morning before pulling back.  So that's a level bulls would like to see recaptured by the close today.

I'm glad we didn't have a big up open in the market, since that often is just a setup for a failed rally attempt.  I would rather see the markets open flat and then build some strength into the close.  We shall see.  There is a teleconference today between the G-7 finance ministers who will discuss eurozone conditions.  But there is some confusion as to whether the details from the call will be released.

Tomorrow is the latest announcement from the ECB.  Some believe they should cut interest rates, while others think that it won't help.  I still find it odd that the ECB is at 1.00% and our Fed is at basically 0%.  China has cut rates, Australia cut rates today, I think the ECB should cut rates also.  I don't think it will have a huge effect but it could help at the margin.

In economic news, the ISM Services index for May came in better than expected at 53.7, which is higher than last month's reading of 53.5.  In Europe, the eurozone services PMI improved a touch to 46.7 for April.  However, retail sales for the region fell during April by 1.0%.

The dollar is up again today vs. the euro, but it isn't weighing on commodities as much as usual.  Oil prices are a little higher near $84.40 and gold prices are up to $1619.  Copper prices are lower.

Asian markets were generally higher overnight.  The 10-year is bouncing a little more to 1.56%.  And the VIX fell back below the 25.0 level but is currently bouncing back above it.  Bulls are hoping for a VIX close below that 25 level.

Trading comment: Yesterday's action wasn't great, but it wasn't that bad either.  The market was able to erase its intraday losses and close flat.  Today the market is mostly hanging in so far also.  I think a lot of folks are waiting for some sign out of Europe that hints at their next policy response.  Its difficult to see our markets held hostage like this to Europe, but as the old saying goes "you have to trade the market as it is, and not how you wish it to be".  Small and mid-cap stocks are outperforming so far this morning.  And financials are the biggest sector leader so far.  So there is potential for today to shape up positively.

Looking For The Elusive Bounce

The markets are mixed in early trade after opening slightly higher but quickly fading back into negative territory.  The first hour dip was relatively shallow and the indexes are trying to make a stand.  The Nasdaq has moved back into positive territory while the S&P 500 is still a few points shy.

The disappointing non-farm payrolls report on Friday really took the wind out of the sails of this market.  I thought folks would have already be expecting a poor jobs report, but the figures turned out weaker than most expected.

The selloff on Friday probably weighed on Asian when it opened last night, as markets there fell across the board.  China dropped -2.7% after the country's services PMI fell to 55.2 from 56.1 the prior month.

Newsflow in the US is very light today, with no big corporate or economic reports to speak of.  Hopefully that will provide a backdrop for stocks to bottom and try to put in some upside reversal today. 

The dollar is lower today after its big recent rally.  Commodity prices are mixed.  Oil prices are slightly higher near $83.45.  Copper prices are higher as well.  But gold prices are lower to $1618 and silver prices are down as well. 

The 10-year yield is higher today after plunging to breathtaking generational lows last week.  The 10-yr currently sits at 1.50%.  Some folks think yields could drift lower, which is always possible, but I think the TBT trade (short Treasuries) is looking pretty good.

As for the VIX, I would like to see it start moving lower.  It nearly hit 27.75 this morning but is currently back down near flat for the day at 26.70.  The days lows are 25.75.

Trading comment: Friday's plunge took the SPX right down to its 200-day moving average, and even a bit below.  The SPX is currently trading at 1276 vs. the 200-day average that sits near 1284.  So my first wish would be to see the SPX retake that 1284 level and its 200-day.  Sentiment has gotten pretty bearish with the put/call closing at 1.37 on Friday.  So we should be setup for a bounce, even as the macro backdrop remains chock full of negative headlines.  June brings another Fed meeting as well as the Greek elections, but hopefully we won't have to wait all the way until those events occur to see some action.

KAM  Advisors has long positions in TBT

WEEKEND REPORT

The following is a reproduction of the weekend report.
 

Stocks:

With Friday’s employment report a few things began to clear up. The first one is the correct cycle count on the stock market. With the break to new lows it’s now apparent that April 10th formed either a very stretched, or very short daily cycle. I tend to lean towards the very short cycle interpretation based on the the trend line breaks I have illustrated in the chart below.

 

But one could make the case for one very long, extremely stretched, daily cycle driven by LTRO and operation twist. No matter how you interpret the last two daily cycles it’s now apparent with the break to new lows that April 10th did in fact form a daily cycle bottom. That puts the current daily cycle on day 37 and now deep in the timing band for a daily (30-40 days) and intermediate (20-25 weeks) degree low. As the intermediate cycle is now on week 34 it’s apparent just how far LTRO and Operation Twist stretched the stock market cycle.

I suspect sometime next week we are going to see a narrow range day and a large buying on weakness data print on the SPY ETF. Then once a swing forms it should mark the bottom of this intermediate cycle.

 

I have mentioned before how news mysteriously seems to coalesce around intermediate turning points. I suspect this time it’s going to be another round of quantitative easing by the Fed (although it won’t be called QE) or a gigantic LTRO in Europe to bail out Spain and Italy, or a combination of both. Either way it’s now late enough in this daily cycle that we should expect a bottom very soon (probably early next week). The fact that this intermediate cycle has stretched extremely long raises the odds massively that the next daily cycle bottom is also going to be an intermediate and yearly cycle bottom.

Once we have printed the intermediate low we should see stocks rally back to at least test the highs. If the market becomes convinced the next round of money printing is on the way then this could be an explosive rally as traders have now been conditioned to expect QE to drive big market rallies.

In the chart below, the first scenario is the most likely in my opinion and would be what I would expect to happen if more QE is introduced. The second scenario would play out if inflation surges high enough and quickly enough to topple the already weak global economy. In that scenario the stock market would move to marginal new highs, allowing smart money to offload positions to dumb money buying into the breakout. What would follow would almost certainly be a 1 1/2 to 2 1/2 year grinding bear market as the slowly deteriorating fundamentals fight ever larger infusions of liquidity from global central banks. Unfortunately liquidity is exactly what would be driving commodity inflation so central banks would actually be making the problem worse rather than better.


 

That being said stocks, especially tech stocks led the last intermediate cycle. I doubt hot money is going to jump back into that sector again right off the bat. No, I expect the stock market will rally fairly quickly back to the old highs but then run into a brick wall that will require considerable consolidation before any serious breakout.

This intermediate rally is almost certainly going to be led by a different sector. As a matter of fact the new leaders are already starting to show their true colors. (More on that in the gold section of today’s report.)


Dollar:

An intermediate bottom in stocks (and commodities) should also correspond with an intermediate top in the dollar. I suspect the reversal on Fridays employment report is going to mark not only a daily cycle top, but probably an intermediate, and possibly even a three year cycle top on the dollar index.

 

I say this because the CRB is now due to form a major three year cycle low, and I don’t see that cycle low forming until the dollar index has topped. Since this three year cycle has already stretched slightly long it’s unlikely to stretch for another complete intermediate cycle. All that means is that the CRB’s three year cycle should bottom along with the yearly cycle in stocks and gold (which already bottomed slightly early two weeks ago).


 

Once the dollar has topped the CRB will stop falling and begin moving back up, into what I think will be a parabolic spike much bigger than what occurred in 2008. That parabolic top should come sometime in late 2014 as the dollar moves down into its next three year cycle low. Or as was the case with gold in 2011 momentum may carry the parabolic move slightly past the dollars bottom.

 

Since the CRB’s three year cycle is already starting to stretch slightly long I am confident that bottom is going to occur right now as gold and stocks all put in their yearly cycle lows. As long as the CRB, gold, and stocks don’t stretch their yearly cycles any further, and I don’t see why they should, then the dollar’s rally out of the three year cycle low is on its last legs.

As I mentioned last week sentiment in the dollar index has reached levels not seen in the last 12 years. This is exactly what one would expect to see at a major three year cycle top.

 

Chart courtesy of sentimentrader.com

So conditions are now in place for major reversals in stocks, commodities, precious metals (already bottomed), and the dollar.

Gold:

I think it’s safe to say that Friday’s action took the short cycle scenario off the table (as well as the D-Wave continuation). Gold not only broke its intermediate trend line, but it also formed a weekly swing. I think we have all the confirmation we need at this point to conclude that gold’s intermediate cycle bottomed two weeks ago.

 

As I pointed out in the dollar section above, this should also mark a yearly cycle low and a B-wave bottom in the gold market. I’m about 99% positive Friday’s rally was the kickoff of a brand new C-wave advance. That being said I wouldn’t expect gold to rally straight up to new highs this summer. It may test $1900 during this new intermediate cycle but I think gold is still going to have to consolidate for most of this year before it can breakout to new highs. My best guess is probably next spring before any sustained move above $1900.

 

This means I think the bear market in miners has probably ended. As everything starts to rally out of its yearly cycle low (and the CRB out of its three year cycle low) the biggest gains are going to be made in the  sectors hardest hit during this correction. Without a doubt that was mining stocks. At the lows two weeks ago miners had reached levels of undervaluation only seen one other time in history. That was at gold’s eight year cycle low in the fall of 2008.

As you can see in the chart below miners rallied over 300% as everything came out of that major bottom in late 2008 and early 2009. I have little doubt we will see something similar this time as the CRB begins moving up out of its three year cycle low and gold begins its next C-wave advance. Hot money is going to start looking for sectors with the potential for big percentage gains.  No sector has that kind of potential more than the mining stocks. As a matter of fact I expect the gains in this sector to be absolutely mind blowing over the next 2 1/2 years.



For our purposes all we need to know right now is that gold is on week two of a brand-new intermediate cycle. In those two weeks the HUI has already rallied almost 19% from the trough to yesterday’s close. Keep in mind this occurred while the stock market was still going down and gold was moving sideways. The outperformance in mining stocks is a subtle hint for anyone that cares to take notice, of what is going to lead the market out of this major bottom. It’s the same hint that was given in late 2008 right before miners launched into a 300% rally.

If you like the weekend report you can try a $10 trial subscription  for the next week.