Market Montage

Reaching Extremes

Mark Hanna — Fri, 18 May 2012 12:09:28 +0000

Yesterday morning I wrote the market needed a "flush" and we definitely saw one. The last of the holdout sectors such as housing, REITs, and even some of the most defensive names were raided. That said, a close on the low on large volume should lead to a bad open and it looked like that was setting up to happen 4-5 hours ago but overnight futures have rallied some 15 points (from 1293 to 1308). It's been a very "curious" week in the overnight session as "someone" has been buying each and every night to support this market. But I'll leave black helicopter thoughts to myself. Europe is bouncing a bit and some traders are saying it's due to hopes for "the global intervention" (that most assuredly will come if things continue to degrade) as there are some G8 meetings this weekend. I don't remember the G8 doing one darn thing during 2008-2009 but I assume the hope is central bankers unite etc. That can come at any time and those caught short will get blasted as they always do when all the King's Horses (and Men) arrive to save the day. We've seen this pattern repeatedly now for 4+ years.

As for the market yesterday's losses have taken the indexes to the second major pullback area in the 1280-1320 range. (The first obvious pullback range was 1340). If you are a Fibonacci fan you can see below the S&P 500 has not even yet pulled back to the 38.2% retracement which would be near 1290. That shows you how massive the run was from October til the end of March.

[click to enlarge]

I can't show it on stockcharts.com charts but the 23.6% retracement level was 1340. The rising 200 day moving average is also 1280ish so the most bullish outcome here would be a convergence of that 200 day and the 38.2% retracement to form an ultimate bottom. Less positive would be a 50% pullback to the 1240s, and then if we have to deal with lower levels than that, we can circle back at that time.

In the very near term this indicator of % of S&P 500 stocks below the 50 day moving average is reaching extremes. Any reading below 20% is usually a flag saying we are late in the game and one of those infamous furious dead cat bounces should surface relatively soon. Of course you do have outlier events such as last August when we saw readings in the single digits – also due to European fears. (May 2010 was the flash crash if you recall)

So we are in one of those spots where the intermediate term is bearish but in the very near term a "rip your face off" rally has the potential to surface at any moment. Hence an uneasy spot for bulls AND bears at this moment in the short term. Unfortunately, a lot of damage has been done technically to individual equities and as we saw yesterday random spots of extreme oversold (gold miners, silver, a few other commodities) are what rallied – but those are 2-4 day type of bounce candidates, nothing lasting.

Last, if you are an uber bull who believes the Federal Reserve can literally run the markets as a puppet master, the scenario I outlined in April (one of two really), could be playing out. [Apr 1: Is it Really as Simple as Don't Fight the Fed?]

So as Operation Twist ends in June, and talk of sterlized bond buying to replace it happens, will back half of 2012 just be "that easy"? And does April-May… the only period the market may doubt a new easing program is coming down the pike, represent the only time this year the market "would be allowed" to correct?

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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog

Whew

Mark Hanna — Thu, 17 May 2012 20:01:02 +0000

Awful close.

Disclosure Notice

Guess Which State Now is the Second Largest Producer of Oil? No, Not Alaska

Mark Hanna — Thu, 17 May 2012 18:30:48 +0000

We've been writing for quite a few years how the Great Recession has almost completely passed by the northern plain states due to the natural resources focus. [Aug 2, 2009: Slice of Central US Safe from Recession Shrinking] [Jun 8, 2008: A Real Green Shoot - the Dakotas] This is especially true for North Dakota which is experiencing "Saudi Arabia"-like good times due to an oil boom. [Dec 9, 2010: [Video] – Need a Job? Head to Williston, North Dakota] [Oct 3, 2011: CNN/Money - Double Your Salary in the Middle of Nowhere, North Dakota] The state just moved into second place nationally in oil production. Of course this doesn't come without costs [Bakken Oil Booms - and so Does Crime on the Plains] but this small state (population wise) has become the little engine that could.

Via AP:

North Dakota has passed Alaska to become the second-leading oil-producing state in the nation, trailing only Texas, state officials said Tuesday. North Dakota oil drillers pumped 17.8 million barrels in March, with a daily average of 575,490 barrels, Assistant State Mineral Resources Director Bruce Hicks said. That compares with 17.5 million barrels in Alaska, though still far behind Texas.
The state's oil patch is drilling at record levels and shows little sign of slowing down. The 152.9 million barrels of crude oil produced in 2011 set a record, surpassing the previous year's mark by nearly 40 million barrels, according to the state Industrial Commission. The number of wells in the state jumped from 6,726 in February to a record 6,921 in March, Hicks said.
North Dakota owes its rapid rise from No. 9 in just six years to improved horizontal drilling techniques in the rich Bakken shale and Three Forks formations in the western part of the state.
North Dakota's oil boom also has pushed the state's population to record levels and its unemployment rate the lowest in the nation.
North Dakota and Alaska each contributed to about 9 percent of the 178.1 million barrels of U.S. production in February, according to the Energy Department's information administration. Those states in February — along with No. 1 Texas and No. 4 California — contributed to about 45.7 percent of total U.S. production, excluding offshore drilling, records show.
To shake Texas from the top spot, North Dakota would have to nearly double its production.

Disclosure Notice

Seeing Panic Selling Today

Mark Hanna — Thu, 17 May 2012 16:34:31 +0000

It is not reflective of the indexes, even though they are down significantly but there is serious selling now going on under the surface – many of the names (a small group) that have held up are being hit hard today. Meanwhile some of the commodity type stocks I have been mentioning i.e. silver as an example are bouncing as the rubber band has been pulled back very far in those groups. But by and large this is really only the second or third day of this selloff I am seeing such individual damage (the 4-7% type of indiscriminate selling).

Remember when Apple simply could never go down? This exemplifies how the market is dominated at the margin by the momo hedge funds – the valuation of the company did not change by 50% thru April …..and then down nearly 20% since the turn down.

Disclosure Notice

100 S&P Points Lost from Peak May 1 to Low (Thus Far) Today

Mark Hanna — Thu, 17 May 2012 15:22:52 +0000

It has been a slow and steady drop, rather than "whooshy" but the destination is the same. The S&P had a high on May 1 of 1415 and this morning's low thus far was 1315. That's a cool 100 points, or 7% in 13 sessions. Certainly in many individual stocks we have seem much more carnage than that.

Disclosure Notice

Starting to See "Bank Runs" in Europe

Mark Hanna — Thu, 17 May 2012 13:10:56 +0000

Institutional bank runs are what really set the U.S. crisis of 2008 off to a new level – that is when a lack of trust in the system becomes apparent, and people simply want to see a return of their capital rather than a return on their capital. It never really happened at the retail level domestically – but it is now happening in certain countries in Europe. Early this week it was reported Greek depositors pulled some $900M worth of money out of their banks in a single day.

Greek depositors withdrew €700 million ($898 million) from the country's banks on Monday, fueling fears of a bank run amid the growing political disarray. With deposits falling, Greek banks become even more dependent on the European Central Bank to meet their funding needs, exposing the central bank to potentially huge losses if Greece leaves the euro area.
Monday's deposit withdrawal far outpaced Greek banks' steady decline in deposits since the start of the country's debt crisis in 2009, as depositors withdraw cash and transfer funds overseas. In the past two years, deposit outflows have generally averaged between €2 billion and €3 billion a month, though in January they topped €5 billion.

I also read a story where wealthy Greeks are flocking into the London housing market to buy 'firm assets'. You can read both as signals some might think they are heading back to drachmas eventually. While Greece is Greece (and the country is apparently paralyzed for another month as we wait for mid June elections), the news out today that we are seeing a bank run in Spain is more troubling due to the size of that economy. Granted this was a bank that was 'bailed out' by the Spanish government in the past week, so it *might* be an isolated event, but something to keep an eye on to see if these actions spread to other institutions.

Customers of troubled Spanish bank Bankia, nationalized last week, have taken out over 1 billion euros ($1.3 billion) from their accounts over the past week, El Mundo newspaper reported on Thursday. The newly appointed chairman, Jose Ignacio Goirigolzarri, informed a board meeting that customers had pulled out funds since the bank was taken over by the government, El Mundo said, citing information from the board meeting it had seen. The government took over Bankia, the country's fourth largest lender, on May 9 in an attempt to dispel concerns over the bank's ability to deal with losses related to a 2008 property crash.

If this continues, what's the end game here? Just as in the U.S. we can expect a massive intervention eventually. Backstops, global central bank strikes, IMF – you know the game by now. Just a manner of the timing of it all.

Disclosure Notice

The Market Needs a Flush…and Some Ugly Charts

Mark Hanna — Thu, 17 May 2012 12:03:01 +0000

This market selloff has been constant but a very slow bleed – a cut by a thousand knives sort of thing. Half a percent here, one percent there, a quarter of a percent over yonder. Unfortunately each time we gapped down last week, buyers came in mid morning (before the late day fade) – which slowed the progress of creating any true oversold condition. Then this week rather than gap downs, there has been a very persistent overnight buyer who almost immediately after every close has been coming in bidding up futures. So the market opens up, goes sideways to up, and then (once again) fades late in the day. "He" was busy at work last night and futures were up significantly (well over half a percent) but most of that was lost about 40 minutes ago as the market went flat. Since then it has gone into the red a bit.

The most "healthy" setup to create a sustainable bounce of any sort would be some sort of flush to the downside. Some panic selling where "dip buyers" finally throw up their hands in disgust, etc. Those folks have been losing fingers day after day in this selloff trying to catch the knife. That "puke" type of selling would more easily lead to buying that lasts for more than 4 hours which has been about the maximum we've seen the past two weeks. But due to conditions listed above, we have yet to see such action. It's been a very slow pulling off of the Band Aid.

Now with that said, certain sectors have shown that 'waterfall' selling – I mentioned commodities earlier this week. Some of the individual charts in this group are massively oversold, and are due for a reflexive bounce. I picked out just a few names for an example of the damage.

Silver

Nucor – steel

National Oilwell Varco – oil services

Vale – mining

Freeport – copper

Peabody – coal

And speaking of commodities, Brazil – which is heavily commodity focused in the major ETF that trades in the U.S. has also fallen off a cliff.

Disclosure Notice

Ugly End of Day Action

Mark Hanna — Tue, 15 May 2012 19:18:29 +0000

We've reversed lower sharply here in the closing hour. Bears want to see a flush, and bulls want to see a flush and reversal (late today or tomorrow) either way, a flush is needed to stop the dip buyers. Let's see how they close 'em.

EDIT 3:55 PM Looks like the excuse of the day is a transcript out of Greece that $700M has withdrawn out of banks. I heard that much earlier in the day, so it is surprising the market reacted to it so late in the day.

Disclosure Notice

Housing Stocks Continue to Have a Good Year

Mark Hanna — Tue, 15 May 2012 17:45:53 +0000

There is a big debate on whether the housing sector is bottoming. Honestly there is no reason to get into the debate – it doesn't matter what "you" think, it matters what "they" believe, at least as a speculator. Further, unlike the bubble years and the crash years of 2007-2010, housing is usually more regional. With the federal government bubble in D.C., Wall Street and foreign money coming into NYC, the oil boom in the northern plains states, Silicon Valley, et al – there are places where the market is tight and rebounding strongly even as there are struggles elsewhere.

Housing related stocks were the first non defensive group to rally in December 2011 – recall back then all the juice was in defensive utilities, dividend stocks, MLPs, and the like. Then when the light switched on Jan 1, and everyone ran into risk – this group continued a strong run in January and February. After consolidating that move, the stocks are once again a leadership group. And it's not just builders as the rehab/remodel crowd is also doing well. Recall, Home Depot had not been down one week the entire first quarter. (it has since begun consolidating that huge move)

This morning homebuilder sentiment hit a 5 year high. In the big picture it does not mean much, but the market definitely liked the news. Here are the 2 main ETFs that deal with the sector; the former deals more with the homebuilders themselves while the latter is more of a mix of homebuilders and 'the supplier base' if you will. Even as the market corrects, these ETFs are holding steady and going sideways - a sign of major relative strength.

While these look like big runs (which they are), if you pull up 5 or 10 year charts you can see how far they are off the peak. Which might mean opportunity even if housing just bumps along the bottom across the country.

Disclosure Notice

Oversold, but not at Extremes – With the Exception of Some Sectors

Mark Hanna — Tue, 15 May 2012 12:54:42 +0000

U.S. indexes are bouncing some this morning in the premarket after yet another poor session yesterday. After sharp selling in the morning, buyers stepped in yet again to rally the indexes, but it only led to a late day selloff which pushed the S&P 500 below the all important 1340 level by a smidge. That sort of action is dispiriting for the bulls, and I am not sure how many fingers they have left from knife catching. NASDAQ 2900 did hold at the end of day after breaking fractionally in the morning.

While the indexes are oversold they are not at extreme levels despite the selloff the past week and a half, simply because almost every day we have buyers attempting to come in intraday. The pattern has been gap down on Europe, buyers step in mid day, buyers get faded to some degree. This negates the ability for a 'flush out' type of situation which traditionally foreshadows a more tangible bounce (within a larger selloff). We would want to see a 'void' where buyers are not willing to step up and then an exhaustion of sellers – but the market complexion is not there yet.

Below is the % of S&P 500 stocks below their 50 day moving averages – while at an extreme for 2012, it is not an extreme within the context of the past few years.

That said, the same groups I outlined last week ARE at extreme oversold levels – many stocks within these sectors have relative strength indexes at 30 or below, and are also below their lower bollinger band. This at the same time the U.S. dollar is up 11 sessions in a row (thanks euro!) and above its top bollinger band. So in sum, we have an overall market that is oversold but not at an extreme level with a few of the 'global growth' sectors (many of which were the leadership stocks of January 2012) falling off a cliff.

Larger picture we continue to see fewer and fewer names being able to hold off from the selling; there is a rotational aspect to where sellers are going and what was holding up say early last week finally relented late in the week or yesterday. In the end the stock market is a market of stocks, and the technicals for more and more of these individual stocks are deteriorating. Again, this does not preclude a sharp 'dead cat' bounce – in fact, a substantial gap down open today followed by some 'panic selling' would have been such a set up, but the market does not make it easy on us.

Key levels are 1340, 1347 (floor from last week, outside of one gap down), 1351 (the rising 100 day moving average which supported the market last week), and then above that the 'box' from 1357 to 1393. Yesterday's lows of 1336, then 1320 and 1300ish to the downside. The Rusell 2000 is in worse shape, as it has been all year. We are seeing some 'head and shoulders' patterns developing in the indexes, which is not a positive in the intermediate term. Long story short, we are in a "boring" area (I don't mean news flow, I mean in terms of activity) where capital protection is job one, and we need this correction to play out – of course there are a lot of macro factors that are dominating the news, but by doing nothing other than looking at the price action, we are somewhere in the 3rd to 5th inning of a correction. How far it goes we have to see and adjust to over time. When there is a sustained move to the upside that lasts more than 3-4 days, there will be plenty of time to get in the pool.

On the economic front retail data this morning stunk, but it is most likely influenced by 'seasonal factors' that the government uses, which overstated the data during the warm winter/early spring. So we're 'giving back' some of those distorted gains. CPI came in flat, which those who love QE should be very happy about – while not the main inflation gauge the Fed uses, it's the most visible one. Remember, the Fed can continue to shoot its bazookas as long as there is no inflation (or at least government reported inflation).