October 9: Obama awarded Nobel peace prize; hundreds mourn Dom; equities market respite indicated by ChartsEdge map and Elliott Wave

Today marks one year from the passing of Dom, a trading mentor cherished by hundreds, maybe thousands. Here's to you, Dom!

This morning, President Barack Hussein Obama has been awarded the Nobel peace price. A socionomically significant event for more discussion later. Without any doubt, it's a great achievement. Interestingly, today's also the day an impact test of the moon just occurred; might also be socionomically significant. Socionomics studies social mood and how it's reflected not only in social trends, politics, and fashion, but also in economics. For instance, social efforts to make peace, benefit the environment, expand prosperity by sharing it, and topple the high while raising the low, tend to accompany market highs, because these all correlate with positive social mood as people are confident and expansive. Conversely, market lows correlate with people feeling low - fearful (later leading to anger, action, increased activity and reviving economic activity), protective, guarded. We'll have to see how the current efforts to mend fences among peoples work out in reality. And to see any related movements in markets. We do know now that the U.S. dollar has been sinking toward new lows which seems to be going along with a changing perception and role of this country in the world. And interestingly, that dollar movements down are going along with equities markets going up. Personally I'm curious how to relate increased confidence with the lower dollar - but perhaps this will change at some point to be not inversely correlated - or maybe it stays inverse, and we'll see whether or not the dollar makes a trend reversal.

In equities markets, it's looked like five waves up from the most recent visit to 50-day moving averages. So some respite or more, will not be surprising. And below is the ChartsEdge Pattern Recognition map for today (thanks again Mike!):

ChartsEdge Pattern Recognition for Oct. 9

Posted: October 9th, 2009 |
Author: Mike Korell |
Filed under: One-Day Market Map |
No Comments »

Suggestions for reading going into the weekend

Here are some suggestions for articles, comments and news reports to help get you started for weekend reading. Not that this should slow you down from celebrating your Friday evening! Have a great weekend all, and we'll "see you later" with more analysis during the weekend!

Technically these first two are "RT" re-tweets from GreenLightAdvisor's GreenLite on Twitter but I don't know how to re-tweet yet, LOL (if these links don't work then just go to the first link just above for GreenLight (also in my sites list at right):
Bill King: Automated front-running on an unfathomable scale http://bit.ly/sGFvf (funny, it reminds me of the situation in UNG and people asking if it really needs to get to $12 - I wonder if there could have been some funny activity with the low at 12.11 being slightly above limit orders at 12.10? well the way UNG is acting it probably does need to get to $12, might end up digging a bit under, and then we can finally see a true reversal pattern)(I'm not saying this does have anything to do with UNG! it just makes one wonder).
- Re-read Raymond Merriman's comments from last weekend, and even the comments from him during the past several weeks - we already knew there would be such stories coming out, at least we knew in general concept. Will be interesting to see what Merriman's got to say this weekend!
- We're lucky we don't need sophisticated high-frequency trading software, we can just use good ol' Fibonacci and other techniques, in any time frame!

Rosenberg interview: Cold truth about the economy and markets http://bit.ly/CrPbA

And some more:

What Commodity Prices Are Telling Us (7/10/09, at Brett Steenbarger's TraderFeed blogspot)

Freaky Friday Potpourri: The Calm Before the Storm (Todd Harrison) and Five Things: The Eventual Upside of Risk Aversion (Kevin Depew), today at Minyanville News & Views

Last Quarter Is Going To Be Hard To Beat (7/10/09) at Bespoke Investment Group

So Where, Exactly, Did Lehman's $130 Billion Go? by Yves Smith, and Guest Post: Jersey's Jitters: An Omen For Public Plans? (7/10/09) at Naked Capitalism

Ben Bernanke Back Into The Populist Spotlight by Tyler Durden (7/10/09) at http://www.zerohedge.com/ (Zero Hedge's new home - though maybe they'll also stay at http://zerohedge.blogspot.com/, I don't know).

Tony Caldaro's Friday evening update at Elliott Wave Lives On.

Dollar and Yen stronger as G8 leaders meet today

It's quite interesting that the dollar and yen are stronger - as are US Treasury bonds - while G8 leaders supposedly debate the dollar's reserve currency status. Also, watch what people do, not just what they say. Still, it's interesting that the yen does appear even stronger than the dollar right now. If the yen carry trade was still being used for buying equities, then a further unwind as the yen strengthens - as I'm thinking it will - can be just another bearish factor for equities (and perhaps commodities as well).

Here's news today reported at MarketWatch:

Dollar in focus as G8 leaders meet
10:55a ET July 7, 2009 (www.MarketWatch.com/)
LONDON (MarketWatch) -- Questions about the dollar's role as the world's primary reserve currency won't go away as leaders of the Group of Eight nations prepare to begin a three-day meeting in Italy on Wednesday.

The issue isn't on the agenda for G8 leaders, but officials from Russia and elsewhere have said it will be discussed when the G8 heads are joined Thursday by the leaders of emerging economies, including China, India and Brazil.

The G8 consists of the United States, Japan, Germany, France, Italy, Great Britain, Canada and Russia.

China, the largest holder of dollar-denominated reserves, and Russia have repeatedly voiced concerns since the beginning of the year over the world economy's reliance on the dollar. China and others have argued in favor of creating an alternative based on the International Monetary Fund's special drawing rights.

The G8 won't discuss the reserve currency issue, but "China and Russia will state their stance that the global currency system needs smooth evolutionary development and this is connected with the creation of several regional reserve currencies, which may then become international," Kremlin aide Arkady Dvorkovich said ahead of the meetings, according to Reuters.

But some currency watchers say recent remarks by Chinese officials and others indicate that concerns about a fall in the dollar, which would be self-defeating for countries holding large dollar reserves, could serve to squelch questions about the dollar's reserve status in the near term.

"There seems to be a recognition among a growing number of administrations that it would be better to avoid a fresh slide in the U.S. dollar from here," said Simon Derrick, chief currency strategist at Bank of New York Mellon, in a research note.

On Monday, German Finance Minister Peer Steinbrueck expressed doubts that the dollar's reserve role would come under threat even though rival currencies will likely grow in influence.

"I don't think it's very probable that the U.S. dollar will lose its role as the leading reserve currency world-wide," Steinbrueck said at a meeting of European finance ministers in Brussels, The Wall Street Journal reported.

Kenneth Broux, market economist at Lloyds TSB, said the dollar will likely be discussed on the sidelines of the summit, but remains skeptical that any major changes in the dollar's reserve status will be coming soon.

He noted recent IMF data showed the dollar's share of the world's roughly $4 trillion of foreign exchange reserves actually grew to 64.9% in the first quarter of the year, up from 64% in the final three months of 2008. That indicates complaints about the dollar's role represent "more talk than action," he said.

First Obama G8

The meeting marks U.S. President Barack Obama's first G8 summit. Leaders will meet against the ruined backdrop of L'Aquila, the mountain city shattered by a massive earthquake earlier this year that left around 300 dead.

"I think they're going to pat themselves on the back," said Roger Kubarych, chief U.S. economist at UniCredit Global Research in New York.

Since the depths of the financial crisis last fall and steep declines in output in the first quarter of this year, the economy appears "more stable, adjustments are under way, and there are no glaring imbalances that require fixes beyond what they already agreed to do," he said.

A draft of the joint text to be issued by leaders at the conclusion of the summit on Friday saw leaders agree to battle protectionism and to increase investment in agriculture spending in the developing world, according to Reuters. The draft calls for a conclusion of the long-stalled Doha round of world trade talks, but didn't set a date for finishing the negotiations, the report said.

G8 leaders are also expected to agree to a plan setting a goal to limit global warming, news reports said.

The financial crisis will be a main topic on the first day of the summit on Wednesday.

Economists said the leaders probably won't be ready to commit to any exit strategies from economic stimulus packages at this stage given the fragile nature of the recovery.

"I think that policy makers will have to consider fresh stimulus measures, and I think it will be apparent before too long that consumers (in the U.S. and the U.K.) do not have the firepower to put their economies back on track," wrote Neil MacKinnon, chief economist at ECU Group, a London-based economic consulting firm, in a research note.

"Of course, this means a further deterioration in budget deficits, but I don't see any meaningful alternative."

Sample review of Phil's Stock World newsletter: (proposed) Reinstatement of Short-Selling Restrictions, and more

Folks, Phil's Stock World seems an interesting site, even if you're not into options (which seem to be their main stock in trade, so to speak!). They have free newsletters, and here's a sample so you can see.  Part of what they do is pull together articles from others, including Mish Shedlock and Tyler Durden.  They mostly include commentaries on topics that probably interest my readers too.  Sometimes they include charts analysis, and you know I can't vouch for those (once I noticed something on Dow Theory that I posted a correction on here), but often good and always good to know what others are seeing.  I'm not intending to tout their subscriptions - just noticed that today's free newsletter has the news about the uptick rule and other interesting items, so this is a good sample if you're browsing the web instead of starting your grilling, veteran-thanking, or however you plan to celebrate Independence Day!

The links in their newsletter below should work to take you to their site so you can read the full articles on the topics indicated. Each of the items is just the opening part of an article posted at the Phil's Stock World site (which I've been adding to the "other sites of interest" at the right side of the page)..

Begin forwarded message:

From: Phil's Stock World <news@philstockworld.com>
Date: July 4, 2009 8:52:59 AM EDT
Subject: PSW Report: More Idiocy From the SEC: Reinstatement of Short-Selling Restrictions

July 4, 2009 - 8:30am

More Idiocy From the SEC: Reinstatement of Short-Selling Restrictions By ilene Posted: July 4, 2009 - 1:01am More Idiocy From the SEC: Reinstatement of Short-Selling Restrictions Courtesy of Mish Inquiring minds are reading S.E.C. May Reinstate Rules for Short-Selling Stocks.  They have been reviled as the bad hats of Wall Street, nefarious traders who cashed in on the market collapse and, some insist, helped precipitate it. Now short-sellers, the market skeptics who correctly called last year's downturn, are coming under even more unwanted scrutiny, this time from federal regulators. The Securities and Exchange Commission appears poised to reverse itself and reinstate rules that would make shorting stocks — that is, betting their prices will decline — somewhat more difficult. Many banks, whose stocks came under attack last autumn, maintain that unfettered short-selling is dangerous. The shorts, their argument goes, helped bring down Bear Stearns and Lehman Brothers last year. Mary L. Schapiro, chairwoman of the S.E.C., has said that considering new rules restricting short-selling is a priority. For the moment, the most likely outcome may be for the S.E.C. to reinstate a rule that the commission itself abolished with a unanimous vote in 2007, under its previous chairman, Christopher S. Cox. Known as the uptick rule, it would bar investors from shorting a stock until its price ticks at least a penny above its previous trading price. To some, the issue is clear-cut. The American Bankers Association, a trade group representing the vast majority of American banks — whose equity values have been especially battered in the last 18 months — recently submitted an opinion in favor of reinstating the short-sale restrictions. Sally Miller, a spokesman for the A.B.A., said the member banks thought there was a clear link between the market turmoil and the rule change. The American Bankers Association Group of Idiots What brought down the banks was excessive leverage (40-1 or greater at Bear Stearns and Lehman), excessive dependence on real estate investments (both residential mortgages and commercial real estate), lax lending standards, off balance sheet investments ($1 Trillion at Citigroup alone), and a host of other piss poor discretions. If the American Bankers Association wants to place the blame on who is responsible for this mess they ought to look straight in the mirror and blame themselves. Moreover, Sally Miller is obviously a complete dunce as to how stock markets work. sally says there is a "clear link between the market turmoil and the rule change". Hello Sally, correlation does not imply causation. The rooster crows at the crack of dawn every day and the sun comes…

Mid-Year 2009 Checkup By ilene Posted: July 3, 2009 - 7:23pm Here's Karl Denninger's mid-year review of his new year predictions, and thoughts on 2009 part 2. Mid-Year 2009 Checkup Courtesy of Karl at The Market Ticker It doesn't seem possible that six months have passed under the bridge of time in 2009 yet, does it?  Yet they have. Let's take a look at the scorecard first from my 2009 Prediction Ticker, remembering of course that I have six months left! The economy will not recover in 2009.  No sign of it yet, "green shooters" be damned.  I predicted that U3 would reach 8% by the end of the year, it has exceeded that wildly, and is now 9.5%.  U-6 also has exceeded my predicted value already. Deflation, not inflation, will become evident well beyond housing.  Already has.  CPI and PPI have come in with negative prints as has capital goods pricing. Housing prices will continue to decline.  Yep. The Fed's attempt to "pump liquidity" will be shown to be an abject failure.  I'll leave this one on the table for now; I believe the evidence is in, but I'm in the minority.  Score this one as a "no result" as of yet. GDP will post a 12-month negative number.  12 months aren't up yet, but we're working on it! The Stock Market has not bottomed.  Remember, this was made with the market around the 900 level.  Major check; we declined to 666.  My secondary prediction was a 50% trading range and a 5xx low; we missed that by 67 points, but I still have six months left.  I'm sticking with this one. Precious metals will not be a safe haven.  Oh Jim Sinclair!  Where's my $1,600+ gold price?  (Or for some, their $5,000+ gold price?)  Missing, that's where.  I know, I know, its all manipulation (instead of debt deflation.)  Check. The Dollar will not collapse.  Hasn't yet. The pound or euro will be where the FX dislocation originates if it occurs.  I predicted Par for both being a possibility, not happening yet.  We'll see what the next six months bring. The US Consumer will go from a negative savings rate to a seriously-positive one.  I'm predicting 4% but it could go as high as 10%.  Major double-check!  We're up close to 7% now.  That's a home run in any book. Commercial Real Estate will effectively collapse.  The REITs have not yet imploded but the pricing and occupancy look like something that came out of the back end of a horse.  Anyone got a finger to lend to push…

Recent Readings from Phil's Stock World

Hey, Look, The Stress Tests Really Weren't Stressful Enough - Posted: July 3, 2009 - 4:36pm

Investing Education Advice if You're New to Options Trading - Posted: July 3, 2009 - 3:17pm

Head and Shoulders and Divergences on Daily SP500 - Posted: July 3, 2009 - 2:53pm

Sell Signal on SP500 Monthly Chart? - Posted: July 3, 2009 - 2:44pm

Short Weekly Wrap-Up - Posted: July 3, 2009 - 8:14am

ROSENBERG: DEFLATION ALL OVER EMPLOYMENT REPORT - Posted: July 2, 2009 - 4:32pm

Bullish Motorola Play In Options Action - Posted: July 2, 2009 - 4:22pm

The June Non-farm Payrolls Report - Posted: July 2, 2009 - 3:25pm

China Requests Debate on Reserve Currency at G14 Summit - Posted: July 2, 2009 - 2:11pm

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Philstockworld, LLC (PSW) nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither PSW nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results. Neither Phil, Optrader or anyone related to PSW is a registered financial adviser and they may hold positions in the stocks mentioned, which may change at any time without notice. Do not buy or sell based on anything that is written here, the risk of loss in trading is great.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only intended at the moment of their issue as conditions quickly change. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

UK banks on "life support"; barter rising in popularity; and other news about the economy and markets

UK Pound Declines as Service Industry Growth Slowed in June (Bloomberg, 7/3/09) - Bank of England policy maker David Miles said yesterday that the UK banking industry “remains on life support.”


Tony Caldaro issued a holiday update at Elliott Wave Lives On today. One thing he said, that "Sweden's central bank dropped its savings rate to minus 0.25%, and is now charging savers to hold their money." As far as I can determine, this is not accurate - they dropped the savings rate TO .25%. Still .... - this concept of a negative interest rate on savings is something predicted by Kondratieff and other long-wave cycles analysts, although it's probably a little early yet for this to become more of a phenomenon as the "winter" cycle progresses. If you're not already familiar with the concept, it has something to do with people being so eager to save that they are willing to forego receiving interest rates, and even become willing to pay fees to keep their cash safe.


Speaking of Tony and his update, he is now marking the Dow Jones Industrial Average as in a downtrend. It didn't break under the "wave 1" level swing low, but definitely moved under the .786 retracement level that even the S&P 500 moved under and now cannot seem to surmount - so it's looking heavy, and the indicators seem to bear out Tony's statement.

Illinois bank failures mount (Chicago Tribune, 7/3/09) - "As I see it, we're now in the cleanup phase for the banking industry," FDIC Chairman Sheila C. Bair said in a statement last week.

Bartering continues to be on the rise - Here's one of the articles about the bartering exchange services (usually on the internet) that help small businesses and individuals to "buy" or "sell" products or services without cash: money.cnn.com - Make purchases without cash (6/25/09).

But if you're still thinking in terms of a sector that can do well, and considering biotech - as I've been considering it (although I'll exit and step aside if it violates its own recent swing lows, and look for a better entry) - check this out: Is IBB the Best Biotech ETF? -- Seeking Alpha.

Folks, I'll return later during this holiday weekend with more!

Mid-week reading of interest on the markets (ChartsEdge map below)

The ChartsEdge daily map for 7/1 is posted below (in an earlier post, last night here). And, I posted a few minutes ago at my UBTNB3 blogspot (links at right) a view of oil showing that both WTIC and USO are at levels suggesting they may well roll over to much lower levels, but still remain poised at a crossroads, suggesting they could try to move to higher levels - so we have to wait for confirmation.

Meanwhile, a few other comments, and then some suggestions for reading on the markets. The McClellan Oscillator either remains, or is trying to remain above the zero line for NYSE and Nasdaq, although it did set back yesterday - not surprising given the action, plus it's conveniently a pullback from the downtrend resistance line I've been marking on the McClellan charts. There are some indicators looking better in equities markets, but they don't guarantee that these markets can do better than a corrective bounce before rolling down to deeper levels. The dollar looked better but still at a low level showing that it isn't quite ready to break out (and to many eyes probably looks like it's threatening to break yet lower again), so it still needs to be watched closely. Treasury bonds moved into a resistance level so although they are looking like they put in their low, they'll need to remain above support (recent swing low) on a pullback. Gold is threatening to just fall down out of its channel support. So, we'll just have to see whether the markets can continue to levitate for another couple of days.

I've recently posted some articles of interest at my UBTNB3 blogspot, so I don't want to repeat those here - you would have seen them already by looking at the "feed" indicating those, at right. These are some items I've found interesting across the blogsophere or web. But just don't take them as indicating where the markets necessarily go. They're just to remain informed of some of the interesting analysis and news out there:

Baltic Dry Index Stuck in a Holding Pattern (Bespoke Investment Group, 6/30/09) (includes a chart showing this).

Would You Buy This Stock? (Bespoke Investment Group, 6/30/09) - Depicts the declines in housing prices, and discusses new ETFs that track this. Personally, I'd be careful - this can be due for a bounce at some point, and just the fact that ETFs can be used to hedge the decline makes me think that a bounce may be getting closer. (Although I agree that housing price declines are far from being over, should take years to work out.)

FAS Is Now XLF (Bill Luby at VIX and More, 6/30/09) - analyzes how the drop in volatility has affected the 3x leveraged ETFs including FAS (and profited those who've been selling options). The FAS did not actually become XLF, it just doesn't have more volatility than XLF by now, as he shows with charts.

Gruma Says ‘Doubt’ Will Continue as Going Concern Bloomberg (6/30/09) - Sign of the times, as Mexico's largest maker of the products used for corn tortillas says it may go under, due to losses from currency derivatives that plunged in value after the peso lost 20 percent in the fourth quarter of 2008.

House Price Crash Rate Finally Beginning To Ease (Henry Blodget at ClusterStock (at BusinessInsider.com), 6/30/09) - reviews the declines and rate of declines in housing prices.

Americans Suckle On The Government’s Teat - Courtesy of Joe Weisenthal and Kamelia Angelova at ClusterStock (at BusinessInsider.com), Posted at Phil's Stock World June 30, 2009 - Shows the increase over the past two decides in the percentage of U.S. personal income that comes from government transfer payments (welfare, unemployment, etc.).

"An Even Worse Financial System Than the One With Which We Began" - Yves Smith at Naked Capitalism, 7/1/09.

AIG: Ready to Blow Up Again - Financial Ninja (6/30/09) - AIG is making additional disclosures in connection with a regulatory filing updating "risk factors" in its 2008 annual report. These involve valuation declines on derivatives (credit-default swaps) sold to European banks.

NYSE Halts Transparency, Feels Goldman Program Trading Disclosure Is Unnecessary; and The NYSE Responds to Zero Hedge (both by Tyler Durden at Zero Hedge, 6/30/09) - Mentions the July 14 date that's interesting because it also lines up with the only remaining significant Bradley turning date before the late autumn.

Happy Valentine's Day! and ... chills from Shiller, Murphy's and Hulbert's sober bits, and the importance of being earning-est

HAPPY VALENTINE'S DAY! Be sure to spend time with the ones you love today. Pay them good attention - it's good for you too!

Let's cover a smattering of personal comments, news, and economics, and then go out and enjoy a great Valentine's Day! At some point later this weekend, I'll do chart reviews to cover where gold may be going, as well as other markets we cover.

First, a personal note and request: This blogsite was born as a result of a terrible tragedy. My trading mentor who taught me and others a number of great things about the markets - how to size up with Elliott Wave, Fibonacci, and additional perspectives, when to TMAR, how not to worry about trade setups (identify when wrong and get out, then re-assess) - all sorts of good things to know ... died suddenly of a heart attack in October. Only in his 40's, he left behind a devoted wife and two lovely young daughters. Sadly, despite his trading success, the situation is not at all what it should be for them - he was struck down right when he'd been putting his all into building his trading analysis and education business. He had great timing instincts, except his passing was terribly ill-timed. This is why my site is dedicated to him and his family - I try to continue the tradition of helping myself and others investing and/or trading the markets, I ask nothing for myself. So please - on this Valentine's Day, please "show the love" that his family is so sorely missing now, dig deep, and make a hearty donation to his surviving family - using the "donation" button at the right side of this page.

And I will thank you deeply for it, and they will appreciate it more than you may ever know.

In other news, the U.S. markets are closed on Monday. Feels fitting somehow. As you'll find when you read more below, as well as other items on this site recently, we're feeling pessimistic about the Dow Jones Industrial Average and other major stock market indices.

Here's some news displayed today at MarketWatch.com:
• BANKING CRISIS
• FDIC seizes four banks - Florida, Illinois, Oregon and Nebraska bank closures make 13 failures so far this year.
• Weak banks may have to be nationalized
• Tax measure to help sale of toxic assets

Isn't that enough to cheer you up, this holiday weekend? But wait - there's more! In this article Feb. 12, A trip down memory lane: P/E ratio making a comeback, MarketWatch's stalwart Mark Hulbert states that, "Believe it or not, the stock market's P/E ratio has risen in recent months." Hu-uh??! Yes ... let's take a look at what he explains in this article:

Here's today's investment pop quiz: Where do price/earnings ratios stand today relative to several months ago, as well as to the beginning of this bear market in October 2007?

If you're like most investors, your answer to this pop quiz is that p/e ratios have come way down. After all, the stock market - which, needless to say, is the "p" in the p/e ratio -- has fallen by more than 40% over the last year and a half, and by more than 30% over the last four months.

Based on earnings on an "as-reported" over the trailing 12-months, the p/e ratio for the S&P 500 index (SPX:S&P 500 Index, 826.84, -8.35, -1.0%) stood at around 20 at the stock market's top in October 2007. At the beginning of 2008's fourth quarter, furthermore, the ratio stood at 25.4.

Are you sitting down?

The comparable p/e ratio as of Thursday night (Feb. 12), based on data from Standard & Poor's, is 29.1.

How can this be, you might ask?

The answer is simple: Earnings in this bear market have fallen even faster than has the market itself. And no matter how fast the "p" in the ratio is falling, the ratio has to climb if the "e" is falling even faster.

Indeed, today's p/e ratio is higher than 97.8% of the monthly readings dating back to 1871, according to data compiled by Yale University Finance Professor Robert Shiller.

A legitimate objection to this historical comparison is that p/e ratios often mushroom during economic recessions. That's when corporate earnings are particularly depressed, which in turn works to artificially inflate p/e ratios. In the latter months of the 2000-2002 bear market, for example, the S&P 500's p/e ratio ballooned to over 45, according to Shiller's data.

But this argument only partially explains why the p/e ratio is not showing stocks to be as undervalued as most investors would otherwise guess.

Consider, for example, a modified p/e ratio that Shiller calculates; one of its virtues is that it overcomes the problems associated with artificially depressed earnings at bear market lows. The denominator of this modified ratio is average inflation-adjusted earnings over the trailing 10 years. Call this modified ratio "p/e10."

Using Shiller's data, I estimate that the current "p/e10" stands at around 14, versus the long-term average over the last 130 years of 16.3 and a median of 15.7. Using this "p/e10" measure, therefore, the stock market is seen to be only moderately undervalued. That's the good news.

The bad news is that, even after an incredibly punishing bear market, we're not even close to the undervalued end of the valuation spectrum. Just consider one data point from the historical record: At the bottom of the 1973-1974 bear market, "p/e10" dropped to 8.3, only slightly more than half of today's level.

To be sure, these historical comparisons don't allow us to pinpoint how close we are to a market bottom, either in terms of price or time. But it does serve to illustrate, as Ned Davis of Ned Davis Research recently put it, "How much fluff and leverage there is in the system, killing earnings."

I've added emphasis in some places to make sure some of Mark Hulbert's and Robert Shiller's data points stand out. While we normally track technical analysis on this site, because you can find plenty of "fundamental analysis" floating around - every now and then some fundamental analysis comes forward with outstanding information that shouts for attention. This is one of those times. Pay attention, folks - the fundamentals do stink for most companies right now!

Are you a "visual investor" like me (and as suggested by the title of the book out, by Stockchart.com's chief technical analyst John Murphy)? Then just wait for a bit, I'll share a chart about earnings. Just quickly, John Murphy's interview was aired on Bloomberg tv last night. Asked about what the technicals are saying about market direction right now, he pointed out that when the put-call ratio is low, that's bearish for the market ... and stated, "the put-call ratio now is the lowest it's been in two years." Folks - I don't know just which measure he uses to see that, but it's what he said, so look out. He said the advance/decline measures aren't helpful, and he thinks we'll test the November lows, and then "we'll see" from there. The only sectors he views as positive (based on being above their 200-day moving averages) are healthcare and specifically medical and biotech (Bristol-Myers, Schering-Plough, Abbott Labs, Medco Health Solutions, Gilead, and Genzyme).

Murphy added that we'll know when the market is really ready to turn, because then those healthcare/medical sectors will top out and conversely, the following sectors will finish bottoming and turn up: consumer, financial, retail, and small caps.

Okay, now let me get to a chart I've been wanting to post for a few days now. It isn't my own chart, it's one of the free ones you can see at Chart of the Day.com. Here's their description and the chart:

It has been said that earnings drive the market. That may be the case but as of late it's been all downhill. Today's chart illustrates that S&P 500 as-reported earnings have declined over 60% over the past 17 months, making this the largest decline on record (the data goes back to 1936). In fact, earnings are currently lower than they were back in the mid-1960s.

(emphasis added)

This chart of inflation-adjusted earnings apparently was generated a week ago. I would think Da Boyz on Wall Street have been tracking such information - golly, do ya think that might have anything to do with why the markets haven't put on the rally "everyone" was expecting so far this year?!

Of course, for actually tracking where the markets are going, I'm going to stick with technical analysis - it's the most reliable way to take the pulse of the market and detect its strength or weakness. But when cross-checking against the fundamentals - well, let's just say, may as well enjoy the love of your family and friends this Valentine's Day weekend - it really is the only thing of value that's proving to have staying power!

**Updated - while we're comparing how S&P 500 companies' earnings look over the decades, let's also take a look at my weekly and monthly charts of the SPX index. Here's how my weekly SPX chart looks now. It's funny how the "C=Z" marking I placed there weeks ago, now looks "too high" on the chart - it's a function of how the chart annotations display while the chart moves through time, evidently. When I first placed it there, I intended the "C=Z" level to be approximately 600/550 to correspond with the large Elliott Wave flat on the monthly chart (although 640 now looks interesting if it could be a triangle target - IF):


For that matter, let's see my SPX monthly chart too:

And for those interested in the VIX, take a look at the VIX - as well as ISEE put/call, and other sentiment data - I've posted today, over at my UBTNB3 site (which you can find in the links within my "Welcome" paragraphs in the upper right-hand side of the page) (underneath my public-service FDA information on the peanut-related recalls and the UnbiasedTrading logo).

Here are some similar interesting analyses you might want to check out, which are based on the Commitments of Traders (COT) data we've discussed here from time to time - the COTs Timer folks have been setting up an interesting system to glean investment and trading intelligence out of those data:

New S&P 500 Setup Bearish (COTs Timer, 2/13/09)
S&P 500 Bearish, Data Mixed for Gold (COTs Timer, 2/13/09)

And, a reminder - always be careful out there, and happy trading! I say that because if you aren't trading with the trade management techniques (stop loss protection, and taking profits when you have them, etc.), and you cannot be happy with your investments or trades, then change your situation so you can be happy ... better for you and your loved ones ... which reminds me once again, do enjoy this holiday!

Market analysis at Schaeffer's

Todd Salamone and Rocky White have posted another set of great analyses at Schaeffer's, so I recommend anyone check those out. I think that- with due respect to others - that their views could support that Elliott Wave alternative I posted. The one with a B wave ~890 and C wave ~750. So I'm still going to remain skeptical against the January 6 high, unless the SPX shows differently.

Financials showing relative strength...

Stock Market Update
12 minutes ago
[BRIEFING.COM]

Thanks to leadership from JPMorgan Chase (JPM 26.57, +1.14) and Wells Fargo (WFC 19.48, +0.70), financials (unch.) are threatening to move into the green and the broader market is paring its losses.

Still, all three major indices continue to trade with losses in excess of 1%.

=============

What a concept! You don't remember reading about this possibility beforehand anywhere ... do you ...?! LOL!
Okay, having said that - pride goes before a fall ... so, I'll keep it sober and unbiased and objective!

Financial fiasco engineered by "Sorcerer's apprentices" continues its widespread damage

Eager financial would-be wizards who fostered the credit bubble remind me of "The Sorcerer's Apprentice" from Goethe's poem Der Zauberlehrling (1797). The old sorcerer's apprentice, left alone in the workshop, tired of getting water by carrying in the pails. (It wasn't good enough to get water slowly by hard work, the conventional way.) So the apprentice used the sorcerer's magic - in which he wasn't fully trained - to give power to a broomstick to fetch more water for him. But he didn't know how to control it, and the workshop started to flood. The despairing apprentice tried to smash the broom into pieces, but each piece transformed into a new broomstick and started fetching water, exponentially faster than ever. When all seemed lost in a massive flood, the sorcerer returned, broke the spell, and saved the day. [source: Wikipedia] Unfortunately for us, the citizenry now sinking "underwater" because of eager "wizards of Wall Street" - goaded by idealistic officials and unfettered by much regulatory oversight, as it seemed everyone got in on the flood of easy credit - won't get "bailed out" so easily.

One of the latest effects of the financial fiasco is showing up in this news item: Bloomberg is reporting that Merrill Lynch & Co. will pay $550 million to settle claims by the Ohio State Teachers Retirement System and other shareholders that it misled investors about assets backed by subprime mortgages. (Find the full story by clicking the "subprime" topic in the news feeds included at the right side of this webpage.) This isn't the only set of pension funds and other investors who bought up great quantities of this stuff. Others have been considering or making similar claims ... and it's a sure bet that there will be even more to come.

Illustration circa 1882 by S. Barth (at Wikipedia)

This is just one of many economic cesspools in which the markets are mired. Thanks to financial ripple effects, we can continue to expect more and more such stories. For example, people whose retirements are now in jeopardy are cutting back on expenditures, thus reducing revenues to companies as well as to governments that rely on sales taxes. People are also likely to have trouble paying taxes of all sorts including property taxes. There are efforts in various stages around the country to reduce the levels of property appraisals and amounts of property tax owed because properties aren't worth what they were just a few years ago.

Local and state governments whose investments have been pinched are finding that tax revenues are declining, at the same time that unemployment and welfare programs are being asked to take care of more and more people.

And on it goes ... did anyone really think this could be over so quickly?!

Now, I'm not saying the mess dictates market direction ... markets tend to have movements all their own, and typically are a leading indicator that will start to come up before economic conditions demonstrably improve. So, I'm not posting this just because I'm leaning pessimistic on the market's next move! I'm just taking a moment to point out another reminder of how pervasive the financial turmoil is becoming.

Ah - it reminds me of a cartoon I patched together a few months ago ... seems like it's still pertinent - hope you like it! (all in good fun of course!)

An article on financial success predicted by ring finger length

Folks, can't resist - this isn't normally the type of news we pick up on, but this article which is the "most emailed" this morning at Yahoo! News is a reminder that keys to success in the markets aren't always what people assume!
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Finger length may predict financial success
http://news.yahoo.com/s/ap/20090113/ap_on_sc/sci_financial_finger
By RANDOLPH E. SCHMID, AP Science Writer Randolph E. Schmid, Ap Science Writer – Mon Jan 12, 9:30 pm ET

WASHINGTON – The length of a man's ring finger may predict his success as a financial trader. Researchers at the University of Cambridge in England report that men with longer ring fingers, compared to their index fingers, tended to be more successful in the frantic high-frequency trading in the London financial district.

Indeed, the impact of biology on success was about equal to years of experience at the job, the team led by physiologist John M. Coates reports in Monday's edition of Proceedings of the National Academy of Sciences.

The same ring-to-index finger ratio has previously been associated with success in competitive sports such as soccer and basketball, the researchers noted.

The length ratio between those two fingers is determined during the development of the fetus and the relatively longer ring finger indicates greater exposure to the male hormone androgen, the researchers noted.

Previous studies have found that such exposure can lead to increased confidence, risk preferences, search persistence, heightened vigilance and quickened reaction times.

In a separate study last year, Coates and colleagues reported that the hormone ... also seemed able to boost short term success at finance.

They studied male financial traders in London, taking saliva samples in the morning and evening. They found that those with higher levels of testosterone in the morning were more likely to make an unusually big profit that day. Testosterone ... affects aggression, confidence and risk-taking.

In the new study, the researchers measured the right hands of 44 male stock traders who were engaged in a type of trade that involved rapid decision-making and quick physical reactions.

Over 20 months those with longer ring fingers compared to their index fingers made 11 times more money than those with the shortest ring fingers. Over the same time the most experienced traders made about 9 times more than the least experienced ones.

Looking only at experienced traders, the long-ring-finger folks earned 5 times more than those with short ring fingers.

While the finger ratio, showing fetal exposure to male hormones, appears to signal likely success in high-actively trading that calls for risk-taking and quick reactions, it may not indicate people who would do well at other sorts of financial activities, the researchers said.

Some traders require additional skills on dealing with clients and sales workers.

And the advantage may even reverse for some, Coates team said, such as traders taking a more analytical and long-term approach to the markets.

One study, which looked at average finger ratios in university departments found that faculty from math, science and engineering exhibited longer index finger ratio, rather than ring finger, they noted.

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It has long been known that psychology plays a huge role in trading success, just as it does for success in other areas of life. Maybe a takeaway here is that, if you believe in this new information, and if you feel that you're disadvantaged by biology in that way, you can address it by focusing on managing your attitude and governing your feelings in ways better suited to the activity.
Just my two cents! Take it easy out there, good luck and happy trading!

Some reading on market fundamentals

Readers here know that I like articles by Bennet Sedacca and Jeff Saut on market fundamentals, posted from time to time at Minyanville (listed in "other sites of interest" at the right side of this page). Here are some quotes from recent articles by both of these fine minds posted there:

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Will Darwinism Return to the Markets?
Bennet Sedacca - Dec 30, 2008 12:30 pm

“It is not the strongest of the species that survives, or the most intelligent that survives. It is the one that is the most adaptable to change.” —Charles Darwin

2008 in Review: Has the Easy Market Call Come and Gone?
As regular readers know, I've had a cautious, even bearish view, towards equities and credit over the past couple of years. The handwriting was on the wall and both seemed woefully overvalued. That being said, my long-standing target for the S&P 500 of 750-800 was reached this autumn, a level that has held, even in the face of awful economic news. I do believe an ultimate low of 500-600 is possible, but most of the pain (in terms of price, not time) has been faced.

Some people will tell you that the bad news is now ‘priced in’ for the S&P 500, but I strongly disagree. According to S&P, its ‘top down/macro’ earnings estimate for 2009 has fallen all the way to $42 per share. This is in direct contrast to the cumulative ‘bottom up/stock-by-stock’ estimate of $70 or so from Wall Street analysts. The Wall Street folks have been overly optimistic for 20 years or more while S&P has a habit of being on the mark since they don’t have an axe to grind.

My point is that while the S&P 500 has moved from nearly 1,600 to a recent 860 (a 45%+ decline), it remains at a healthy 22 times S&P’s earnings estimate for 2009. Bulls will tell you that the market is cheap because even if the $42 earnings number is correct, these are ‘trough’ earnings - or the low point for the cycle. I'll concede that even if the $42 is a trough number, the market is not cheap on any other metric, price to book, dividend yields, etc. In addition, P/E ratios based on trough estimates assume that earnings will rebound sharply once the bear market is over, but this is certainly not our outlook.

I must concede that the easy call being out of stocks or underweight stocks in general has been made, and is now probably past for the most part. For 2009 and forward, a general call on the overall market won't be as easy, but good money can be made in company selection and sector rotation.

While equities in the US suffered 40% losses for 2008, corporate bonds and other credit-sensitive securities got killed (some ‘core’ fixed income managers were down as much as 25% for the year). The pity about 2008 for most investors is that they were let down by what was supposed to save them: diversification. 2008 will be remembered as the year of the ‘1 beta event,' a year where there was nowhere to hide, except in Treasury notes and bonds.

My firm fully expected the ‘1 beta event,’ which explains why we were nearly void of equities (for clients that allow us to go to a 0% weighting) from April until our buy in the 750-775 area in the S&P in November. While my firm isn't close to being bullish about stocks in general -- or even credit in general -- I believe that pockets of value are beginning to develop in some risky asset classes. I also believe that we'll enter a period of Darwinism where the best managed companies pick up the pieces of poorly managed companies that will likely fail. I believe that Darwinism will occur at the national, corporate, municipal and individual level.

... Losses stemming from the Credit Crisis have now crossed the trillion-dollar threshold as you can see in the table below (tables are in the article posted at Minyanville). Worse yet, 242,273 job cuts have been announced in just the public world of financial companies since the Crisis began. If that weren’t bad enough, Bloomberg now actually has a ‘Bailouts’ tab on this part of their analytics. Truthfully, had I not witnessed all of this first hand, I wouldn't have believed it to be possible.

This may be the list of companies that doesn’t emerge from this period of Darwinism. And if any do, it will do so only as a shadow of its prior self - run by the government or broken into pieces, rendering it unrecognizable. Companies that won't survive are likely those that aren't able to finance themselves in a profitable manner. Let’s face it: If your name is on these lists, it's because you needed the money - plain and simple.There are actually others like American Express and General Electric Credit Corporation that are indirectly on this list, as they've used the Fed’s Commercial Paper lifeline to finance themselves. They're not directly on this list - yet. But look for others, including other insurance companies, real estate investment trusts, and other finance companies like GMAC, CIT Group, and Capital One among others. When we're all said and done with this bailout process, many trillions of dollars of taxpayer money will be thrown at the mess that the Fed helped start in the first place.

What kind of company will survive the test of Darwinism? Those that can finance themselves, have pristine balance sheets, and have management teams that saw the economic mess coming, tightened their belt and rode out the storm. These might include companies like Johnson & Johnson (JNJ), Exxon Mobil (XOM), Pfizer (PFE) and Proctor & Gamble (PG). These companies don't need to come to the debt market to finance themselves all the time. What was more pitiful than the auto industry hearings in Washington where a bunch of grown men sat there and said "we recklessly managed our companies, we are almost bankrupt, please bail me out." Darwinism suggests that these companies should fail. In fact, they should fail to make way for better run companies with stronger balance sheets and more-adaptable management, even if they're from another country.
....

Who will be the Losers and Winners in a World of Darwinism?
The short and simple answer to the question of survival is that those companies -- who were prudent with their finances and took the time to understand the impact of a global unwinding of the largest credit bubble in history -- will be around to operate in the next phase. Whether you're running a Fortune 100 company, a hedge fund, a small business, or simply an investment portfolio, those that were prudent with their capital and weren't greedy will likely survive.

And whether we're talking about running a brokerage firm into the ground due to excessive leverage and greed or an investment portfolio with excessive leverage, the sad truth is that you won’t be around to take advantage of the wonderful opportunities that exist after an asset class gets carved in half. ...

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I don't want to copy in his whole article, so check it out at Minyanville if you want to see what he's recommending for, as he puts it, "what to own during 2009, not for all of 2009" - themes he thinks will work during 2009 and perhaps into 2010. Personally, I especially appreciate his comments on the fundamental outlook, confirming what technical traders already suspect: that the fundamentals don't signal the all-clear for a bullish market outlook, either.

And now, below are quotes from the recent article by Jeff Saut:

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Jeff Saut: Expect Further Embezzlement
MV Respect - Dec 29, 2008 11:43 am

Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

Mark Twain once opined, "History doesn’t repeat itself, but it often rhymes." Nowhere is this truer than in the stock market because it is mainly a combination of fear, hope, and greed only loosely connected to the business cycle. ...
....
Manifestly, only when the tide goes out does one discover who’s been swimming naked. Unfortunately, if past is prelude, like in the 1930s there will be more "Mr. Madoffs" in the coming months, which should lead to increased negative investor psychology combined with massive Congressional hearings resulting in more wrong-footed regulations like the Sarbanes-Oxley Act. While this is likely the course we are steering over the coming quarters, the real question becomes, "Have the equity markets already discounted such events?"

In past missives we have suggested that the equity markets have been in a bottoming process since the October 10th capitulation “low.” We have given numerous metrics for that view, but in this week’s Barron’s the always insightful Stephanie Pomboy makes our prose pale in comparison when she states:
"In the very near-term, there are a variety of reasons to anticipate a rally in risk. ... Most notably, yields on corporate credits have climbed to multidecade (and in the case of junk, record) extremes. At the same time, cash [must be] burning a hole in investors’ pockets with 0% yields before inflation and dollar debasement."

Obviously I agree with my friend Stephanie, which is why my firm has been recommending the scale buying of distressed debt situations like BlackRock MuniHoldings Insured (MUE) and Nuveen Insured Dividend Advantage (NVG), both of which sell at discounts to their net asset value and have over 6% tax free yields. We also have been recommending Lord Abbett Bond Debenture Fund (LBNDX) with a near 9% yield. Moreover, even though we have avoided the financial complex for years, for those wanting exposure to said complex our vehicle of choice remains the iShares S&P U.S. Preferred Shares (PFF), which is yielding over 10% and has a 78% exposure to the financial complex’s preferred shares (see the attendant chart). Additionally, during the past few weeks we have added the iShares MSCI Japan (EWJ) and iShares FTSE China (FXI) to the ETF portfolio.

... [A]s MaroStrategy’s Bob Parenteau notes, "The prime monetary policy operation becomes the Fed’s ability to use its infinitely expandable balance sheet to purchase longer maturity Treasuries, GSE debt, mortgage backed securities, and in the extreme, even equities and corporate bonds with the objective of getting private market interest rates down and asset prices up." My firm continues to think the Fed will be successful. Happy New Year everybody.

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Well folks, these quotes from two articles written last week by two analysts I respect, although not obviously in full agreement. Maybe this also fits with the comments from the technical analysis side - from here, it's possible to project either a good rally, or a significant correction in equities indices (the S&P500, Dow Jones Industrial Average and Nasdaq generally) - so whichever side you choose to play from, be careful out there!

Modern sculpture in Melbourne, and other holiday bits

NORAD Santa tracker available on Twitter, Google Earth this year (article).

Check out the Twitter at NORAD Santa tracker Twitter.

Still - "If you're the old fashioned sort, you can still call NORAD toll free on Christmas Eve at 1-877-446-6723 and talk to a live Santa tracker."

The Twitter site also includes a YouTube video (looks like the screen shot below) - fun to follow this evening ...





Also, here's a YouTube video of an 1898 German Santa film. And here's Mannheim Steamroller - Hallelujah at YouTube, and their Carol of the Bells at YouTube (both with light shows).

And here's a site at About.com where you can click to see free Christmas movies (including It's a Wonderful Life) and other videos!

Happy Holidays all!

Good reading

Good article to read, posted at Minyanville (you can find in links under "other sites of interest", right side of this page) yesterday - here are some parts of it:

Jeff Saut: Short-Term Uptrend for S&P 500
MV Respect Dec 22, 2008 10:30 am

... But sustaining it is like walking a tightrope.

Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

Winter officially began yesterday morning, with the arrival of the winter solstice. Recall that solstice means “standing-still sun;” and on December 21st at 7:04 a.m. (EST) the sun “stood still” over the southern Pacific Ocean (Tropic of Capricorn). At that time the sun’s rays were directly overhead, giving the impression that the sun was truly standing still.

.... I paid tribute to this year’s “turning point” by facing the sky and screaming at the top of my lungs. It was one of many such screams emitted over the past year, as we watched the S&P 500 (SPX) lose nearly 52% of its value since October 2007. However, my sense is that the economy, and the various markets, are near a turning point.

That sense is driven by last week’s slashing of the Fed Funds rate, which will allow it to “float” between zero and a quarter of 1%. The operative word here is zero, as the Fed is effectively offering the banks “free money.”

With the Fed Funds target rate down to the 0-25 basis point level, the Fed is now “out of bullets” with regard to conventional monetary policy. Consequently, the Fed felt compelled to announce that it “will employ all available tools to . . . preserve price stability.” As Bloomberg Television put it, “The Fed is all In!” “All In” indeed: It now appears the Fed is moving to influence other interest rates. ...

To be sure, this Fed is being much more aggressive than the Bank of Japan following Japan’s “bubble bust,” as well as more aggressive than the Fed of this country’s Depression years. I think the Fed will be successful in getting private-market interest rates down and asset prices up.

Accordingly, I think last week’s Fed action will mark a “turning point” for the real economy, and would argue the equity markets tend to lead economic turning points by roughly 6 months.

Since the typical recession lasts 18 months, a 6-month economic “turn” from now would jibe with the NBER’s recent revelation that the current downturn began in December 2007 (12 months ago, even though we still haven't experienced 2 negative quarters of GDP).

Moreover, in addition to my firm's oft-mentioned metrics for a better equity market since the October 10th capitulation “low,” the ensuing downside devastation recently left the S&P 500 (at its nadir) a massive 34% below its 200-day moving average (DMA).

Ladies and gentlemen, the last 2 occasions that the S&P 500 exceeded the gap of 25% below its 200-DMA was in October 1974 and October 1987, both of those readings were at major market lows for the indices. Their subsequent advance was more than 50%.

Given all the previous mentioned reasons for my firm's “call” to gradually re-accumulate stocks, in some cases using hedge strategies, we now add Kiplinger’s 6 Reasons to Buy Stocks Now:

1. Stocks are battered and cheap.
2. Stocks are overdue for a rally.
3. The low-risk alternatives are pathetic.
4. It’s not the 1930s.
5. The market shows signs that the worst is over.
6. If not now, when?

Plainly, I agree, and would note that even though the flow of news has become materially worse over the past few months, the DJIA is not much changed from mid-October. .... Just as investors were conditioned to believe that any decline wouldn't gather much traction back in 1999 and 2000, they're now being conditioned to believe that any rally isn't sustainable.

Meanwhile, last week the Volatility Index (VIX) closed below its November closing low of 47.73 and the Russell 2000 (RUT) tracked-out above its 50-DMA (at 481.45). If the DJIA (8579.11) can likewise break out above its 50-DMA at 8702, the Dow’s November 4th reaction high becomes the next upside target.

Bettering that high, with a like move from the D-J Transports, would register a Dow Theory buy signal; the first such signal that would come from “cheap” valuation levels in more than a decade.
... Unsurprisingly, given interest rates, the Dollar Index lost 2.8% on the week; yet we think the worst of the dollar’s recent decline is over since the ECB will likely have to lower rates as the European economies sink deeper into recession. Surprisingly, given the dollar’s weakness, crude oil fell a shocking 26.8% last week. Hereto, I'm of the view that oil is bottoming, as these prices should cause China to increase its strategic reserves.

Still, Asian asset classes are the real beneficiary of a falling US dollar and low oil prices, which is why my firm is long the iShares MSCI Japan (EWJ) in the ETF portfolio. And this morning we're adding iShares FTSE China (FXI).

The call for this week: I'm leaving for the nation’s capital, so these will be the only strategy comments for this holiday-shortened week. Nevertheless, as my friends at Bespoke note, “The S&P 500 remains in a short-term uptrend that formed off of its November 20th lows, although it’s walking a tightrope to maintain it.”

Obviously, I agree ...
Merry Christmas everybody.

Mid-week reading

It isn't always about trading ... it's good also to collect thoughts about what's going on. Stay informed about the big picture. Here are some excerpts from a good article today on Minyanville (you can find it at Minyanville's site, listed in the "other sites of interest" to the right side of this page):

After the Rate Cut?
Prieur du Plessis Dec 17, 2008 10:45 am

"Fed's move signals large-scale monetization of debt markets."
The US Federal Reserve pulled out all the stops yesterday in a frantic effort to save the US economy from collapse and stem the deflationary forces. The Fed funds rate was slashed from 1% to a target range between 0 and 0.25% – the lowest the central bank’s key rate has been since records began in 1954.

In reality, the Fed is simply aligning its target rate with the effective rate, thereby pushing monetary policy into an era of ZIRP, i.e. a zero interest rate policy.

The Federal Open Market Committee’s (FOMC) statement said the “outlook for economic activity has weakened further” from its previous meeting in late October, indicating that the “Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability”. The statement also discussed specific actions that would move the Fed further toward quantitative easing.

In my opinion, the Fed’s communiqué in reality signaled the large-scale monetizing of the US debt markets.

....

An email from Bennet Sedacca (Atlantic Advisors Asset Management) said:
“[The] Fed has declared war on prudence and savers and rekindled the ‘Moral Hazard Card’ - except this time, I believe they have created the largest moral hazard ever seen. Of note is that this intervention has occurred in the third week of the month (options expiry for the greatest impact – playing games with an already dysfunctional system that they created) and may force prudent, risk-avoidance types, to take risk, at precisely the wrong time.

“I respect markets, and won't sell short against this force that seems invincible. But, as always, will remain cognizant of the Big Picture, one that Bernanke and Co. cannot see, it seems. In fact, it feels like they are making a mockery of our system, that they are desperate and will print enough dollars that will force other central bankers to do the same.

“With stated short-term interest rates at 0 (and likely to stay there for the foreseeable future), 30-year Treasuries at 2.3% and stocks at gargantuan price/earnings ratios, we will look to continue to protect our investor's capital as we have done to date. I don't like being forced into a game of 'Liar's Poker'.”

With Treasuries and agency debt potentially subject to a great deal of price risk at these levels, and the US dollar appearing to be topping out, where does the Fed’s “betting the ranch” policy leave the stock market?
....
In addition to the Fed’s attempts to inflate asset prices, there are a number of short-term positives for equities.

1. The period post Thanksgiving through the end of the year has usually been a bullish time for stocks, based on studies by Jeffrey Hirsch (Stock Trader’s Almanac).

2. With the exception of the Russell 2000 Index, all the major US indices yesterday breached their 50-day moving averages. Should the bullish seasonal tendencies provide a further tailwind, the next targets for the various indices are the November 4 highs and the key 200-day moving averages, as shown in the table below. On the downside, the December 1 lows (not shown) must hold for the rally to remain intact.
[chart omitted - see full article]
The number of S&P 500 stocks trading above their respective 50-day moving averages has increased to 53.4% from almost zero in October. However, only 5.4% of the index constituents are trading above their 200-day lines.

3. The CBOE Volatility Index (VIX) (green line) has declined from the 80s in October and November to 52.4 yesterday. It is not uncommon for short-term volatility to be at extreme levels at bottom turning points, and for stocks to improve as the “storm” grows quieter.

4. I mentioned in a previous post that “for a more lasting market turnaround to happen, I would like to see ... a 90% up-day.” Yesterday was likely another 90% up day, the first since December 1st. The Lowry's figures are looking better and the Buying Power Index has just broken out above its declining trend line.

5. Since the peak of the TED spread (i.e. 3-month dollar LIBOR less 3-month Treasury Bills) at 4.65% on October 10, the measure has eased to 1.83%. Although this measure is moving in the right direction, credit spreads need to narrow further to indicate that confidence is returning and liquidity is starting to move freely again.

6. On a fundamental note, it’s hard to get a grip on the “E” component of price-earnings multiples, but I would be remiss in ignoring the fact that 39% of the constituents of the MSCI World Index sell at a discount to shareholders’ equity. “The cash-rich companies allow investors to pay nothing for future earnings streams,” said Jean-Marie Eveillard in an interview with Bloomberg.

7. Markets have been shrugging off bad news since the poor ISM manufacturing and payrolls data of two weeks ago. Richard Russell (Dow Theory Letters) said:
“This is all the more dramatic since this potential upturn has arrived in the face of black-bearish news. Markets bottoming and rising in the face of bearish news are often the most profitable ones. I have never seen a bear market hit its low amid happy news headlines.”

Notwithstanding the improvement since the November lows, it remains too early to tell whether a secular low has been recorded. The chart below
shows the long-term trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (or momentum) indicator (blue line.) Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1991, 1994, 2000 to 2003, and again since December 2007.

Stock markets are still caught between the actions of central banks furiously fending off a total economic meltdown on the one hand, and a worsening economic and corporate picture on the other. The rally may have more legs, but failing further technical and fundamental evidence, I remain distrustful as to whether this is "it.”

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Folks, check out Minyanville's site for the full text of this article, and others with timely news, analysis and information.