Who hit the Reset Button...Recession or Revolution?   

Updated November 20,2008 LM Lupo

How many banking shares does it take to buy a happy meal, today? I don't know, but the ugly sight of the old bull sliding downhill upon the market with tail raised is enough to make one forgo any sort of meal. 

If you've followed my software trading models through the last few months, readers will notice that we are at the 4+ standard deviation area in almost every market,  which reveals an area that contains little historical precedent.  As a result, we have not one single position in any public scoreboard currently open, but that might change when the quant model targets are reached.  The trend is nearly impossible to fight against, but one can enhance returns along with the trend, as we have in the past.  For now, though, not a good idea.  As forecasted in last weeks quant models, inevitable new lows have been breached, but what after the 7000 DIA target, 700+ S&P target and 20-24 QQQQ targets are reached?   

Options, derivatives, and most hedges are extremely overpriced just as the October update below mentioned.  Value is fleeting here, but the slide will stop ...eventually.  We are closer now than most think so keep thinking forward to the survivors of tomorrow and those investments that are now trading at or below book value and still profitable despite the worst crises to strike in the history of western finance.  From a U.S. standpoint, Chinese based investments carry a natural currency hedge, inflation hedge, and offer economic rebound resiliency.  Not surprisingly, as a group they continue to outperform the market.  U.S. Treasuries, though mighty now, will soon begin to feel woozy from the malaise of overproduction. 

The 'R' word to fear here is not Recession, but  Reset, aka, Revolution.  On a positive note, the software based quant models remain fairly accurate with bottoming action to form near the price targets noted above.  Then we can simply tally our banking shares for an unhappy meal and push that ugly bull back up the hill with tail lowered.  If not, time to ponder and hedge for the "R" word.

Updated 10.8.2008 LM Lupo

Market Extremes Create Low Risk High Value Opportunity

For the first time in over 18 months, computer models (watlooSoft©), valuation models, and sentiment models have flashed buy signals in the U.S. equities market.  As I noted in yesterday's alert, we have now reached the 3rd Standard Deviation in prices for QQQQ's, SPY's, and the VIX, VIN combo.  Even more telling, the Bullish Percent Index reached 0% for the NYSE materials sector and the NASDAQ reached 2.0% leaving in the wake of the current market splash the very definition of capitulation.  After all, if this truly is financial Armageddon, buy guns and not puts.

In addition, for the first time in two years I closed the entire fundamental driven short portfolio, based on the Lupo Kioutas valuation model, for a +23.8% gain.  High risk remains with Financials, Treasury's, and the U.S. Dollar despite recent blips to the upside; however, as noted here ad nausem, Chinese based equities continue to show promise based on earnings growth and a macro environment stable for economic expansion.  Diversified ETF's such as the iShares:FTSE/Xinhua (FXI) offer value here, as do some Chinese health care stocks such AOB, SVA, and SSRX trading at roughly 4x to 5x 2009 earnings even with a dramatic global slowdown.  U.S. based health care ETF's are also worthy of consideration, (XLV), (VHT).  More on the specifics later...

Updated 9.22.2008 LM Lupo

Fundamental Analysis Macro View

Bringing the bottom line up front for our readers, we are still in the midst of a major bear market, but the good news here is that we definitely have a short-term trading bounce in place which should last several weeks as near term capitulation was reached last week when the VIX and VIN, which are contrary sentiment and option indicators, reached extreme levels not seen for almost a decade. 

But a bear market bounce is all that the market will muster at this point.

 

Several of the stockholders of the Federal Reserve Bank were found insolvent this year, namely, Bear Sterns, Shearson Lehman, and others not captured in the media. While the Federal Reserve does not publish and disclose the primary shareholders that fund the private corporation known as the “Fed”, congressional disclosures in 1976 revealed them here.

Yes, the Fed is out of resources, and the currency printing presses have been ignited by Paulson, which has also ignited a number of commodity markets while simultaneously drubbing the bond market like a rental car on its last contractual day of return. 

All of this adds up to a terrible fundamental background for equities, and a very bearish environment for the U.S. Dollar.

As we noted in our Bond Market Report, the hyperinflation threat appears to be unfolding with support from the Paulson Plan and U.S. Treasury spewing several trillion dollars of funds that will slosh into the U.S. and global markets denominated as dollars. 

Still, there are some opportunities, particularly with commodity related stocks, foreign equities -- not denominated in U.S. dollars -- and shorting opportunities of ETF's.  In a sentence, any equities with exposure to short dollar bets should perform very well.
 

Technical Analysis

WatlooSoft, our proprietary computer modeling system, continues to mark 1250 as critical resistance.  We are currently trading 1209 in the S&P 500 as of this writing while WatlooSoft projects a sharp rally to the 1350 area, based on technicals, sentiment, and our enterprise market models. 
 

Conclusion:  Risk remains high for specific sectors such as financials, while asset based equities should outperform the market even in a continued steep decline.

We make market order out of market chaos.©

3.18.2008 LM Lupo

Technical Analysis with WatlooSoft©

Updated 3.16.2008  Financial Trader Research

This update is market gruesome and requires reader discretion, not to mention an editorial iron stomach. 

As I stared at our computer models and our home page macro synopsis it became all too obvious that our banana republic anthem for the U.S. at Financialtrader.com was no longer a prescient forecast for the U.S. citizen and U.S. economy, but rather now a reality. See our prior forecasts here for the US Dollar, Bonds, and Stocks.

The U.S. Dollar has collapsed over 50% in just the last few years, our interest rates in the collateralized debt market required federal freezing, gold and crude oil are trading as hyperinflationary currency hedges and our debt markets stagger like a drunkard with the weight of the largest global debt default in written history hanging upon its shoulders... and not to be outdone, the Federal reserve is now in the business of printing dollars full time (it's obvious, no?) with the US Treasury performing grip and grin meetings with the press on the weekend TV coffin circuit while bailing water for Bear Stearns. 

But its not time to buy, yet.

The federal plunge protection team will engage the S&P futures contract near contract lows of 1250, per our WatlooSoft© October 2007 forecast.  While we have not documented the actual fed processes -- it nary resembles a free market -- I refer the reader to numerous Chicago pit floor traders bankrupted by this overzealous market peace keeping phenomenon.  In the end, all is well, and not too many free market participants ever complain about the profit-gorged greedy bear trapped by the feds in their folly.  The question remains, will the feds be believed?

For now, risk remains exceptionally high as measured by the sentiment indicators of the VIX, VIN, valuations, and of course, fundamental constructs.  Foreign equities will continue to outperform U.S. based equities, but the U.S. is likely to drag even stellar performers into the doldrums of mediocrity.  We remain long the commodities in our master portfolio and a few select stocks, particularly Chinese based equities. 

The chart below depicts WatlooSoft's© initial and updated forecast in green and red respectively.  Suffice it to say that if the Feds do not hold the 1250 defense line in the S&Ps another 20% rout in U.S based indexes is in short order.  Faith is clearly unscientific, but that is all that holds the 1250 line for now.  Given the U.S. penchant for poor leadership and impeached integrity, it's not hard to see this price level giving way to much lower prices.  Would that it were better, but now that most have sown to the financial wind, it is time to reap the financial whirlwind.

10.22.2007 by LM Lupo, Financial Trader Research

This is my third equity market update in yet a third financial crisis.  First, we had a China based sell-off and as I noted then, it would be quickly forgotten, and it was.  Then we saw the sub prime market rattle the cages of confidence and again I wrote that the market would make a new high, and sure enough the S&P's and QQQQ's printed new highs.  But now cometh the fall-out of the lending bubble with many SIV's, hedge funds, and greedy financial institutions performing Enronesque belly up routines from an over indulgent, Fed induced collateralized debt market binge and purge.  So, is this yet another buying opportunity, and if so will the indexes trade to new highs with impunity in the next quarter or two? 

Valuations Wax, Market Wanes

From a fundamental perspective, the S&P 500 is still overvalued at 17 times earnings, and valuations are rich throughout several sectors, including the leveraged financial sector, and technology sector.  Specifically, several of the QQQQ's technology leaders such as Google (GOOG), Apple (AAPL), and Research and Motion (RIMM) don PE's that average near 50!  AAPL alone accounts for nearly 10% of the QQQQ's valuation followed by GOOG and RIMM at 4.3% and 2.8%, respectively.  This concentration of wealth (three stocks account for 17% of index valuation)  cloaks severe fundamental weakness in the current market.  The situation improves little when analyzing the concentration of wealth in the SPY, and SPX.  As I noted before, this is a classic late stage bull market phenomenon that always bodes poorly for future performance.  But never fear, the Fed is here...

The Printing Press Fed?

It's a good thing that the US Fed's can create money with a digital blip, otherwise the money presses would be on fire right now.  As I noted in our Master Portfolio update, the Fed has no choice but to create yet another asset bubble (stocks) and lower interest rates aggressively.  All of the major monetary commodity markets including crude oil, $US dollar, bonds, and gold have already sniffed out this somewhat obvious, yet banana republic type strategy. 

Whether or not the US markets print new highs is irrelevant at this point in the cycle.  After all, just how sustainable are current valuations with shrinking growth rates now a reality?  The risk reward ratio clearly favors foreign markets, particularly China.  In fact, research here shows that the US bull market will end well before the Chinese market cools. After all, many China listed ADR's possess compound annual growths rates (CAGR) from 30% to 50%, with a local economy growing at 12%, compared to the seemingly indolent US growth rate of 2.6%--at best. 

Risk remains high in the US with the concentration of market wealth in the hands of so few equities and the underperformance of the broader market at large.  There are better places to be than US based equities at this time, and foreign stocks (not US)  still have plenty of room to run despite mystifying articles from shrinking financial presses such as Barron's, and Forbes who only surpass their volume of poor market calls by the selling of their editorial credibility to the highest bidder.

Concluding the fundamental portion, there is an outside chance that the US equity markets will trade parabolic with a handful of over valued stocks leading the way to new highs, but that hardly makes for a convincing investment case.  Of course, a collapsing dollar could force massive funds into stocks in order to stave off Weimar Republic like currency declines.  This occurred most recently in Argentina, where the local bourses traded over 10% higher in a single day to conserve their currency value.  But that hardly makes for a convincing investment case either.

WatlooSoft© Technical Analysis Output

WatlooSoft© is inhuman, like many on Wall Street, but it has a better track record than most.  For now, sentiment figures are beginning to improve (some) with technical support near 1475 in the S&P500, which is also where the 200 day institutional moving average rests.  Unfortunately, the inference engine is bearish, and unlike our past two market calls where WatlooSoft© turned bullish to capture excellent entry points, the technicals are now bearish with an initial 1150 to 1250 price objective for the S&Ps in the next few months, which is a bear market by most definitions.  Would that we could report better, but it is what it is.  See the S&P 500 weekly chart below for likely initial support areas.

We make market order out of market chaos.©

By LM Lupo,   Updated 7.29.2007  Financial Trader Research

The international and US stock markets sold off sharply last week creating headlines and significant amounts of fear as measured by the volatility indexes, and put-call ratios.  In fact, many call options gained ground even though the indexes printed nothing but red, typical price action at market extremes. 

It's worth mentioning that our WatlooSoft© decision support tool indicates that from a time perspective the market is literally hours from a significant trading bottom.  Likely Monday of this week, 7.30.2007.  For prior results from WatloofSoft©, see our buy signals that were generated after the Chinese based correction below.

Fundamentals

The fundamental market constructs still remain overvalued; however, interest rates, liquidity, and a moderately strong business environment should fuel the indexes to yet another euphoric high.  Remember how quickly the Chinese correction was forgotten? 

We still have very few equities with market exposure since the risk-reward ratio is simply not prudent at this time, but the continued trend of higher commodity prices, gold, and bonds provides reasonable opportunity to participate in market advances well into the final blow-off top.  Given the calendar change from August into October and the fact that we are heading into a tumultuous election year, timing is difficult.  We remain bearish long term, but do see opportunities in the near term, particularly with respect to current market extremes.

We make market order out of market chaos.©

7.1.2007  Financial Trader Research

Since our last update, the markets obliged the bearish forecast but only traded one percent lower with respect to the DJIA, and the S&P500.  Interestingly enough, the QQQQ's, which showed the greatest weakness and distribution are now actually up roughly 1.5% since that forecast.  A weekly close for the QQQQ's above 48 corrupts the near term bearish construct and would support the market in a positive type of holding pattern.

The bearish forecast remains but the market now has improving bond yields and sentiment in its favor, something that was lacking in our last forecast, but anticipated in our interest rate and bond models. 

The black box signals and Watloosoft© are still pointing lower, despite the fact that core fundamentals have improved in the short term.  Unfortunately, fundamentals don't buy stocks--people do--irrational people at that.  In addition, markets have a tendency to fall under their own weight and the recent selling pockets reveal price vacuums, which are warning signals on the horizons.

A blow-off buying binge with all of the major indexes printing new highs is not out of the question, and would not be atypical to end a bull market.  Nevertheless, we remain bearish until overhead supply in the QQQQ's  is convincingly removed above 48.00, or sentiment as measured by the consensus, VXN, and VIN improves materially.

As a note, we did add several commodity based stocks in our master portfolio recently including the following:  Goldcorp (GG), SunOpta, STKL, crude futures and gold futures.  Given that commodity stocks and commodities peak at the top of the business cycle, where does that logically leave equities as a whole?  At the top, of course...or close to it.  The bearish signals are based on valuation and not trend following.

Last update 5.18.2007

QQQQ & S&P Bearish Market Forecast 5.18.2007

Since our last update the market has performed as expected printing new highs shortly after the Chinese driven stock sell off, (see here below).  But now the US macro market construct has deteriorated significantly. 

Welcome to tulip mania where the major US stock indexes are now trading in vertical fashion surpassing the frothiness of the great bull market in the late 1920's, which now looks tame by comparison.  But the 'new high' headlines create commissions, profits, and stokes euphoria as though it were a religious experience, or better yet a Jimi Hendrix experience. 

Is the bull market supply of euphoria now over with last call being whispered in the din of the buying frenzy?  

Yes, the major indexes, measured by the S&P500 and the NASDAQ tracking stock QQQQ, now reveal signs of printing a significant top in price.  The last sentiment readings on the Dow Jones index read 96% bullish and that is not a misprint, with the VIX, and VXN option indicators pricing in less than a 1% downdraft risk. 

That is exactly how the masses act at the top, defining extreme.  The Dow is currently up almost two years worth of gains (16%) in only two months and there is more, but the QQQQ's narrate the story far better than mere statistics and historical norms, what American reads anyway?  

While the DOW, and large cap stocks traded higher over the past few weeks, the QQQQ's actually traded lower.  This was mostly due to the energy bias of the large cap indexes.  Cyclical stocks such as energy always lead at the top of the market.  And of course, there is IBM that figured out they really can't grow the company after all so they thought buying their own shares at 6 year highs was a good idea for investors.  How else could they get the stock to trade through 100?  In a sentence, short sighted and dim witted, but its a euphoric party remember?.

Technical Problems

The QQQQ's reveal a classic triple jab in price pattern as well as the fundamental bearishness of slower earnings acceleration.

The chart below shows the three time attempt of the Nasdaq breaching 47 (triple jab), all of which were rejected by the market.  In addition, for the past three weeks the market has closed within the 46.50 range, which is convincing evidence of distribution, particularly when viewing the waning volume support. In the meantime, the Dow and large cap indexes continue to print new highs, which is yet more bearish divergence.

The chart below is not an anomaly, but simply the best representation of the current market conditions. Overall, the entire breadth indicators as measured by the McCllellan oscillator, new highs vs lows, momentum, database scans of leading stocks, etc, all tell the same story...money is quietly leaving the market and the bull market is over.

We are closing all open long positions in the Mini-Re portfolio and master portfolio, save for one issue (SVA), and adding the QQQQ's to our master portfolio as a short for the 2nd quarter.

We make market order out of market chaos.© 5.18.2007

NASDAQ & S&P Market Update 3.19.2007

Since our last report, March 6th, not much as changed in the equity markets.  As we expected, the markets continued to probe for buying support and made a slightly lower print over the past week where the market experienced some enthusiastic buying.  There remains a probability that the market might stab an additional 3% to 4% lower to complete a short term correction of roughly -8% in the S&P500 or -10% in the NASDAQ. 

But sentiment, a contrary indicator, continues to support a more immediate bullish scenario.  As we noted earlier, from a fundamental perspective, the yield curve has greatly improved during the sell-off and this continues to have a mitigating effect on lower stock prices.  The mortgage market collapse continues its role as the primary agent, and we expect the fall out to be constructive for bonds and treasuries, which is where more than half of our master model portfolio positions currently live. 

In addition, stronger Asian economies such as China are deliberately choking growth with higher rates.  A trend that will impact US growth rates sooner rather than later, and reinforce the multi-decade freefall of the US Dollar. 

We will begin rolling off several sell ratings in our conservative Mini-Re™ portfolio (up 4.0% vs. S&P off -2.0%) and replacing them with more promising buy ratings.  Also, high quality equity candidates will soon replace some of the T-Bill positions in the Master Model Portfolio.

It usually takes the market awhile to stabilize, so there is no rush.  We are currently researching equities that are holding up well during the consolidation period, or trending higher with promising business models.  Resist the urge to bottom fish stocks making new 52 week lows here unless your focus is on trading rather than investing.  

From the big picture perspective, keep in mind the market is only a few percentage points from all time highs:  there is a fundamental reason why some equities are now breaking down to 52 week lows, and one is better off not finding out why. 

We expect the next rally in stock prices to be much more selective and primarily based in technology and health care sectors, which includes most of our current buy ratings such as LVLT, MR, and SVA. 

In conclusion, we expect the old bull market to continue for another leg up, with a dwindling list of fresh highs, and even fewer sector leaders. 

NASDAQ & S&P Market Update 3.6.2007

Corrections and bear markets do have one redeeming quality, they usually stay around no longer than a disloyal friend.  And that is a good thing for it reveals how many investor friends your stocks actually possess.  Friends you say, 'my stocks are outright lepers in this environment'.  But there is good news...

The market has sold off so quickly and with such fear that our sentiment models now throttle near bullish, after reading negative for weeks.  In addition, our initial support objectives in the SPX and the NASDAQ were met this Monday, 3.6.2007, on the close of trade.

At the very least, our WatlooSoft© models are currently flashing a trading bottom, which is positive when bundled with the sentiment figures.

The mortgage meltdown from the housing market gluttony of the past few years stands as the primary fundamental negative.  Not to worry though, the feds will certainly smash rates soon to soothe frayed nerves and avoid an outright $600 billion dollar mortgage market collapse, just like they did with Long Term Capital.  But, as we noted earlier in our bond report, the fed is a bit behind the curve here; nevertheless,  they will catch up, and make Alexander Hamilton proud. 

Some of the equities that contain attractive enterprise business models and reveal lower risk entry points are as follows:  LVLT, (for those that missed our first report)  ELOS, CRXL, and MR.  Our report portfolio, which has been 75% short the market over the past months, will crawl towards a 50% equity exposure relatively soon at the current rate of decline.

Technical False Breakout

It is obvious now why the technical false breakout alert we detailed here over the past few weeks caused such concern.  The market 'water-falled' in just a few days, (as expected, if 16% odds are ever expected), wiping out months of gains.  As we noted in our most recent report, we do not foresee a severe bear market measured by a 30% decline or more in the major indexes.  In fact, the S&P and the NASDAQ might trade another 4% lower in the next few weeks, but that would be the extent of the damage near term, particularly since the public is selling the current move rather than buying.

Conclusion:  Risk remains in the indexes, but favorable winds are beginning to develop for select buying opportunities.  We'll update these opportunities when the research avails.  As it stands right now, there is not a more fortunate house on or off the Street than ours, but since the doghouse is not far from the penthouse...we'll keep it humble.

We make market order out of market chaos.©

Earlier Sell Signal Report

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