The market has now priced in the election, a new Fed QE2 program and some pretty decent earnings surprises. Since Ben Bernanke announced QE2 on August 27th the S&P is up +13%. Now most expect the Republicans to win the house, the real unknown is can they take the senate too? One would expect selling into the news Wednesday or Thursday, but we could see a spike and selling hold off 'til Friday's Non-Farm Payrolls. The consensus estimate is for a gain of 62,000 jobs compared to the loss of 95,000 in September. Employment is about to get a lot worse but it won't show up in the payroll report. Currently a person can qualify for a total of up to 99 weeks of unemployment compensation when combining state and federal programs. Those extensions end on November 30th. Nearly one million people will stop receiving checks in December and another 3-4 million will lose benefits by April. Nearly five million people will no longer receive their weekly checks. The average check is about $300 that comes to a loss of $80 billion in spendable income over the next several quarters and could knock another sizable chunk off the GDP.
Bottom line, be prepared for some profit taking,however this will present an opportunity to buy.
This is the EIA chart of crude inventories for the last year. Note that crude inventories are at the high for the year. Last week saw a pickup in the pace of imports by nearly 1 mbpd. They went from 8.6 mbpd to 9.463 mbpd. Bearish signal for the energy bulls. The rise in inventory levels to 366.2 mb and closing in on the 22-yr high on May-1st 2009 at 375.3 mb makes it hard to be bullish about oil. Yes... global demand is rising but these are U.S. inventories and the WTI is priced based on U.S. inventory levels.
Subscribe in a readerJust some interesting links and video now that we have some idea what QE2 will be like... Kass: QE 2 Is a Con Game>>LINK
CNBC's Fast Money: Pros: S&P About To Wipeout Gains For Year? >>LINK
With about a third of earnings reported, the markets are about a week away from the mid-term elections & the FOMC meeting. This week end the G20 finance ministers met in South Korea. G20 inks pact to avert trade war LINK Geithner, in an interview with Bloomberg Television after Group of 20 finance leader meetings concluded here on Saturday, said China views a higher yuan rate versus the dollar as in Beijing's interest because it does not want the U.S. Federal Reserve to control its monetary policy. LINK
Next week's economic calendar is active with multiple housing reports, Fed surveys and the GDP on Friday. The GDP will be the most important report for the week and our first look at Q3. Estimates have risen slightly over the last month but the whisper numbers are still in the 1.6% range.
Looking at the major indexes, the Dow Jones recently had a Golden Cross and tested its April highs...the other major indices look likely to follow. Itz has held to the 1225 level as a target, we could see a double top? After all this rally has most likely factored in a 'large QE2' & a Republican sweep in November...what if it doesn't occur? Most investors are looking at taking profits in '10 & not '11 as well. Bottom line expect 1225/1250 to be resistance, the S&P500 chart looks like a possible Cup & Handle may set up into the New Year. Yes, I know don't fight the Fed, but will the Fed let investors down?
~~*Note Proshares Ultra Short Crude Oil (SCO) 1/2 position stopped out Friday @ $13.00 on enttry of $13.00 thus remain 1/2 position cost basis is $12.50 set stop @ $12, Itz may resuggest adding to SCO in coming days.
As directed in past blog post as well as Twitter updates, entered the second-half position of Proshares Ultra Short Crude Oil ETF (SCO). The first position was enterd @ $12.70, average cost basis is $12.85. Oil broke below support of $80.50~ currently will this updat is being written in futures oil is at $79.29. The charts had forewarned that oil was set to make a significant move downward, the commodity/currency rally had reached a breaking point. Today's news from China on a rate increase along with Treasury Secretary Timothy Geithner's strong dollar comments rallied the dollar.The Canadian market/dollar came under pressure also link>>. API reports oil inventory build near forecasts - MarketWatch - link EIA reports Wednesday.
Well, the normally bearish September/October period for stocks has not been the norm so far this year. Guess the old adage don't fight the Fed holds true. As David Tepper pointed out on a recent CNBC visit, if the economy recovers..stocks go up...if the Fed does QE2...everything goes up. Looks as if the latter is in motion.Bottom line COM or the cost of money. If the Fed decides to launch a major quantitative easing program to drive down rates and stimulate the economy then the dollar suffers. Dollar denominated assets like metals, oil, commodities, real estate and even stocks are forced to rise in dollar cost in order to maintain parity with their prior real valuations. As Itz pointed out the other day, it expects crude oil to track the silver move in the New Year & make an aggressive move higher. However, Itz sees the next few months in a sideways churning process, with oil trading in a $78/$84 range...followed by a breakout in January, upside oil target $110. For now Itz has exited the Proshares Ultra crude OIl ETF (UCO) & taken a 1/2 position in the Ultra Short (SCO) with an $11 stop.
Bernanke alluded to another QE program in his speech on Friday. As long as the Fed is applying pressure to rates and the dollar the market will continue higher. Eventually it will end badly. Probably very badly but that could be weeks, months or even a year down the road. Don't fight the Fed.
The Fed Beige Book is the latest update of economic conditions in the various Fed districts this week. Most likely it will show very little improvement, otherwise they would not be talking up QE2 in every appearance.
The second report is the Philly Fed Manufacturing Survey. This is viewed as a proxy for the national ISM at month end. The Philly Fed will give analysts a last chance to alter estimates before the end of October. Expectations are for a minor improvement in the Richmond district.
The financials took a hit this past week, Itz portfolio has JPM & C which looked as if they were ready to finally move and lead the S&P higher. On Friday S&P cut Bank America to a hold from a strong buy due to ongoing foreclosure woes. The problems stem from the major banks using robo-signers to sign tens of thousands of foreclosure documents without adequately researching each loan. Attorneys general from all 50 states launched a joint investigation into allegations that mortgage companies mishandled documents in foreclosing hundreds of thousands of homes. Dick Bove, with Rochdale Securities, said the banks could lose up to $80 billion from the various suits and forced buybacks. The investors who bought the original loans may have a way to force the banks to buy back all the mortgage securities at face value if they can prove there was fraud at any point in the process. Expect the major banks to slow or even halt making new loans until they decide what the impact of the foreclosure problem will be to their balance sheets. That will slowdown the home market even more than the foreclosure halt. The housing sector makes up a fifth of the economy and this mess could be a material impact that pushes us back into a recession. For that reason the administration should be proactive in making sure the investigation and resolution is done quickly and with a minor amount of pain to the system. Itz actually views the pullback as an opportunity to buy or add to the financial sector.
The U.S. Dollar came very close this week to hitting the ITZ target of 76, but the more important currency ITZ is focusing on is the commodity based Canadian dollar $CDW, which hit parity to the U.S. dollar.
Gold prices declined slightly after hitting an intraday high of $1388 on Thursday. Goldman Sachs raised its twelve-month target price to $1,650. Goldman said gold could rise another 28% by the end of 2012, also Silver +30%, Copper +28% and Cotton +54%. Several key reports came out pointing to rising oil demand around the world -but the U.S. is still mired in the quicksand of high unemployment. The various factors supporting prices last week including the dollar, hurricane, OPEC, closing of the Houston ship channel etc, have all faded from view and the current November contract expires next Wednesday the 20th.
On the earnings front, this week will be seeing the heaviest of reporting and by the end of the week we'll have a good idea of how this quarter will shape up to be. Technology seems to be the favored sector as the Nasdaq100 finally broke out, perhaps money is coming out of the banks and into tech? The S&P500 is finding some minor resistance at the 1175 (May highs) but Itz still believes that the Inverse H&S pattern completion should play out & hit the 1,225 level. Most analysts believe the market will finish the year higher, Abby Joseph Cohen is expecting 1275-1300 on the S&P. On Friday though another well-known and very accurate market analyst, Doug Kass of Seabreeze Partners a fellow Tweeter posted the following on Twitter... 'I now believe there is at least a 50/50 chance that the year's high in the S&P Index has been put in now $$ 9:43 AM Oct 15 via TweetDeck'
Itz view is that we've had an unbelievable run over the last 6 weeks and a pause or minor pullback is to be expected. The next major events will be the mid-term elections and the "how much/how long" QE2. By the start of the holiday season, we will be entering a 'void' we could see a period of -sell the fact- as investors consider the tax factor in '11 and begin taking profits in '10...Doug Kass may be correct.
CHARTS:
Weekly AAII Report
GOLD Going to $1,650
A look at the week's top business news stories, which stocks the pros are recommending and what you should watch for next week.
Is crude oil set to breakout? Itz believes so...but when? Looking at the Itz Pix portfolio, it is weighted to energy as well as gold/silver/copper. Itz issued a recent suggested 1/2 position buy in the Proshares Ultra Short Crude Oil ETF (SCO) as a short term hedge against the portfolio. Crude oil $WTIC had a nice run in September, some of the technical indicators were giving a sell signal on oil, thus Itz initiated the hedge.
In a recent blog update Itz noted that this week would present several key events that would move oil prices.
Oil climbed for a second day in New York after an industry-funded report showed U.S. crude supplies fell and the dollar declined against the euro, increasing the appeal of commodities as an alternative investment.
The FOMC gave the green light on QE2, expectations of the Federal Reserve will ease monetary policy further and after the American Petroleum Institute reported that inventories decreased the most since July. Futhermore, the International Energy Agency raised its global demand forecast and as China imported a record volume of the commodity in September.
Crude stockpiles dropped 4.01 million barrels last week to 362.1 million, the American Petroleum Institute said. A U.S. Energy Department report today may show stockpiles climbed 1.45 million barrels last week, according to the median of 18 analyst estimates in a Bloomberg survey.
The IEA increased its forecast amid signs of "apparently resurgent" demand in the U.S., Germany and Japan in the last quarter, the Paris-based energy advisory agency said yesterday in its monthly Oil Market Report. Crude use worldwide will average 86.9 million barrels a day in 2010 and 88.2 million barrels a day in 2011, the IEA said
Energy Department Forecast
The U.S. Energy Department also raised its demand outlook. The world will consume 86.06 million barrels a day this year, the department forecast in its monthly Short-Term Energy Outlook. That's up from 85.95 million last month and 84.33 million in 2009. Demand will climb to 87.44 million in 2011, 80,000 barrels a day higher than last month's projection.
The Energy Department increased its oil price forecast for 2011 by $1 a barrel to $83. The estimate included an assumption that OPEC will boost its output as prices climb, tempering a bigger gain. The department raised its 2010 outlook by 60 cents to $77.97. Oil has averaged $77.90 a barrel in 2010.
The Organization of Petroleum Exporting Countries will keep output quotas unchanged when it meets today because the oil market is well-balanced for the next few months, Rafael Ramirez, Venezuela's energy and oil minister, said yesterday in Vienna. The 12-member group pumps 40 percent of the world's crude.
~~Note: EIA weekly inventory reports one day later this week, Thursday @ 11a.m.~~
As this report is being written Crude Futures are up 75 cents link
Itz Stock Chartz see oil trending in a tight range into the New Year then breaking higher.
The Fed released it's Sept FOMC minutes today @ 2pm. link
The Federal Reserve is leaning toward taking two steps to boost the economy: Buying more Treasury bonds to drive down loan rates, and signaling an openness to higher prices later to encourage more spending now. Fed policymakers also spoke at their last meeting about setting a higher inflation target, hoping that would get people to spend more money in short run. As a matter of fact they mentioned 'Inflation' 24 times throughout the minutes and 'Disinflation' only once.
The minutes showed the Fed was concerned that the economy was growing slower than they had expected. While Fed officials didn't see the economy slipping back into a recession, they worried it had become vulnerable to "potential negative shocks." They expressed concerns that unemployment, which has been at 9.6 percent for the past months, would stay elevated.
Publicly Fed officials since the September 21 meeting have suggested the program will be smaller than the $1.7 trillion one it initiated during the recession. Under that program, the Fed purchased a mix of mortgage securities and government debt. The effort was credited with forcing down mortgages rates and providing support to the weakened housing market.
In recent remarks, two Fed officials have suggested the new purchases shouldn't exceed $500 billion.
At the September meeting, some Fed officials thought the economic benefit of the debt purchases could be "small." A smaller program isn't expected to lower rates as much as the Fed's crisis-era program did, economists say. Also, there's concern that even cheaper loans will fail to get people and companies to ramp up their spending. Thus far, they haven't been confident enough in the economy or their own financial prospects to do so.
The question now remains, have the markets factored in a large QE dollar amount? If so will the Fed highly expected move then disappoint and incur a sell off?
Barton Biggs, managing partner at Traxis Partners, tells CNBC he expects the S&P 500 to move up another 10 to 15%.
Discussing what we can expect from these sideways markets through earnings season, with Jeff deGraaf, head of technical analysis research at ISI.
Back in July Itz noted the similarities the S&P 500 had to the '03/'04 period >>LINK
On Sept. 1st & through out the month Itz had noted the 'Inverse Head & Shoulders Pattern' on the S&P500, calling for a completion target of 1,200+ (Itz target 1,225) >>LINK
TRADE ALERT: ITZ PIX was stopped out of Proshares Ultra Crude Oil (UCO) @ $10.50. This is the remaining half-position entered @ $8.75 , netting a 20% profit. Itz Stock Chartz suggests taking a half position in the counter part, Proshares Ultra Short Crude Oil (SCO) @ $12.70. With QE, the dollar as well as other currencies plus the EIA & OPEC news on Thursday, the price of crude will be volatile. Reason for 1/2 position now and seeing how things play out over the next several days. We could see a bullish divergence pattern like that of April/May...for now set STOP @ $11. Add remaming 1/2 position on break over $13. Oil falls to near $81 in Europe amid doubts over US economic stimulus plans..read more
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