Stock market trend: Market Remains in a Correction 

 

Biotech Alert

Before I present my weekly stock market message below, I want to alert you to an event coming up this week in New York. It's a big confab between all of the chief executive officers in the biotech industry -- big and small.

 

I always keep about 20% of my portfolio in small-cap biotech because the fate of small-cap biotech companies is largely determined outside the business cycle and instead by the fate of their drug discovery trials.

 

You may want to watch my new video that appears at TheStreet.com on how to pick small-cap biotech companies. It features an old friend of this newsletter in the top biotech analyst in the country Andrew Vaino.  Click here to see the video.

 

Market Pulse

Last week's market action was typical of a stock market in a correction trying to find direction. Big gains at the beginning of the week rapidly turned into big losses towards the end of the week while Friday was a down and up elevator the likes of which we haven't seen for a while.

 

If you agreed with my cash call over the last several weeks, none of this market volatility would've bothered you in the slightest. The fact is the bullish upward trend set last March has been broken, the market remains in a correction, and any attempt to go long this market in the hopes of picking up some bargains is simply a reckless gamble rather than a careful speculation.

 

In this regard, I urge one and all not to be lulled into the siren song of TV pundits who want to lure you into this market. Last Friday, as I was getting ready to do a segment for CNBC one half hour before the market closed, I was astonished to see one of these pundits declaring that Friday's recovery from steep early day losses had somehow marked the bottom much like the March 2009 bottom. Based on that claim, this commentator was urging viewers to start running with the bulls again.

 

If it somehow it turns out that this commentator is correct and Friday marked the beginning of a new bullish uptrend, it won't be because of astute analysis but rather because it just simple blind luck. The technical condition of the market is a mess. Three big fundamentals also weigh heavily on the bulls:

 

First, the tightening of monetary policy in China coupled with an escalation of increasing trade and geopolitical friction between the US and China is likely to send contractionary ripples through the Asian supply chain -- from Japan and South Korea to Thailand and Taiwan.

 

Second, the sovereign debt crisis in Greece and Spain can end in either one of two ways -- both of them bad.

 

One way is through a wave of defaults, in which case a credit crisis in Europe will be triggered, the European already anemic recovery will stall, and European demand for exports from the United States will fall, softening the US economy.

 

A second  way Europe's crisis could end would be with a bail out of Greece, Spain, and maybe Portugal by the Euro zone. That would result in a significant expansion of the European money supply and a plunging euro. That's not good for the US export sector either.

 

The third bearish macro wave bearing down on the stock market is this: the Obama administration has clearly crossed a Keynesian Rubicon with its reappointment of Ben Bernanke of the Federal Reserve, with its support for Tim Geithner as the Treasury Secretary, and with the continued presence of the ghost of Lord John Maynard Keynes a.k.a. Larry Summers in the White House. From this Keynesian administration, we are now virtually guaranteed a "tax-and-spend" strategy far more likely to destroy jobs than create them.

 

This is not to say there are not some bullish tailwinds we must be mindful of. There is no question that the manufacturing sector of the US economy is steadily gathering strength. The only question, however, is whether consumers will eventually come to the party. We've talked a lot about this before -- the consumer is weak. If the consumer stalls, all that inventory on the shelves of American businesses will turn into more job losses and production cutbacks.

 

The broader point is this: why risk your money now when the market trend is so clearly undefined? I know this is a new way of thinking for some of you buy and hold investors; but this is the way of the new investment world and you better get used to it. The nice thing about it is that in times of turmoil like last week he won't be running around in a panic or like a chicken with your head cut off every time the market goes down.

Stock market trend: Market in Correction 

Market Pulse

The U.S. markets are in a major correction.  If you see any bubblehead portfolio manager on TV telling you this is a great buying opportunity, know that this man/woman is merely a gambler rather than an intelligent speculator.  For the foreseeable future, the market is a roulette wheel. Until the dust clears – that is, until market participants figure out the direction of the economy -- this is a good time to be in cash (and non-cyclicals like biotech).

 

I note with some small degree of vindication that the S&P 500 finished last week at the same level as it was when I called a market top in October, 2009.  Perhaps all I really missed was a needle peak that has now evaporated faster than President Obama’s high public opinion rating.

 

As for why the market has turned bearish, Obama has certainly been doing his part.  This last week he could have truly ushered in some real change on his economic team.  Imagine him announcing that he was replacing his easy money, ultra-Keynesian, babes in the woods triad of Summers-Geithner-Bernanke with the Dream Team of John Taylor at the Federal Reserve, Paul Volcker at Treasury, and Martin Feldstein as top White House economic advisor.  That would have truly turned this country around in one single day.  (Note, by the way, that I didn’t even mention Christina Romer and Jared Bernstein.  These two White House accoutrement are truly Lilliputians at a time when we need Big Bold Thinkers.)

 

That said, the economic headwinds we face transcend anyone at the helm.  Yes, we had a big GDP number.  But few believe it won’t be revised downward, and even if it is big, it does bring closer the day of reckoning when the Fed must confront its bloated balance sheet and the White House must confront its ballooning deficits.

 

Sure, the markets could take off again next week despite this gloom.  But the bigger point here for traders and investors is that the bullish trend has been broken and the days of making easy money like March 2009 to June 2009 have been replaced by more cautious times.  Stay tuned.

 

Stock market trend: Market in correction, Watch for bearish downtrend

Market Pulse

 In my previous weekly newsletter, I urged extreme caution in the market until the question of whether the market was at the beginning of a correction had been resolved. This last week, with the American stock market taking its worst set of consecutive losses since bouncing off the March lows, we got our answer. The market is definitely in a correction.  

The next question is whether this will be a brief and mild technical correction or the beginning of a longer term bearish downtrend signaling a dreaded double dip recession. We are going to have to watch this situation very carefully, but the Obama administration is certainly not helping investors now.  

I don't buy into the conventional buzz that President Obama "caused" the markets to drop last week with his latest heavy-handed regulatory initiative to downsize the big banks. That certainly didn't help financial stocks, but this was a market ripe turnover for more fundamental reasons.  

I especially don't buy the argument that the rising probability that Federal Reserve Chairman Ben Bernanke will be fired likewise contributed to the market's downturn. You can certainly make the case that firing Bernanke would be better for Wall Street. Here's why I have been advocating that Bernanke should be fired since last October in this newsletter.  

To the argument that Bernanke helped rescue the financial system at its darkest hour so he should be reappointed, it is important to remember that it was Bernanke's actions that helped get us to that darkest hour. In particular, first as a board member of the Federal Reserve and then as its chairman, Bernanke helped perpetuate the low interest rate environment that fueled the housing bubble which caused the crash. (The analogy that the astute CNBC economist Larry Kudlow uses is: Bernanke should not be credited with fixing the window, because he's the guy that broke it.  

Now here is why Bernanke should be fired. First, he truly and mistakingly believes that the Federal Reserve can save the US economy simply by maintaining ultralow interest rates. All that belief is doing is swelling the Fed's balance sheet and creating conditions for a severe bout of future inflation.  

Second, Bernanke's ultra-easy money policies are debasing the dollar and thereby creating havoc with the global economic recovery. The dollar is falling not just because of the low interest rates per se. Bernanke has also spawned a pernicious carry trade in which speculators borrow dollars at low interest rates and then go invest those dollars globally in commodities and emerging markets.  Moreover, as the dollar falls and drags down the Chinese yuan with it, this dynamic erodes the competitive advantage of countries around the world with respect to both the United States and China and thereby slows down their export growth and economic recovery. It is beggar thy neighbor on a grand scale. 

Finally, Bernanke has sought to turn the Federal Reserve from a central bank entrusted with maintaining a sound currency and economic stability into a regulatory octopus. In doing so, he has undermined the credibility of the Federal Reserve and created an enormous political backlash. The politics of this are particularly interesting. Several months ago when I began my anti-Bernanke campaign, Bernanke merely faced some Republican opposition. Now, with Senators like Barbara Boxer of California and Russ Feingold of Wisconsin jumping the Bernanke ship, his nomination is in deep doubt. This is as it should be. We do not need a Federal Reserve chairman with a 30% approval rating who got us into a mess and whose prime qualification seems to be that he sort of helped us get out of it -- when we're not out of it at all. Enough said. 

 In summary, at this point, cautious investors may want to be trimming positions and moving to cash. For those with an appetite for risk, my favorite strategy has been to use TWM, an exchange traded fund for ultra-shorting the Russell 2000 index. To gamble is human, to speculate is divine.

Navarro on TheStreet.com

Click here to review my videos on TheStreet.com.  

———-
Peter Navarro is the author of the best-selling The Coming China Wars, the path-breaking The Well-Timed Strategy, and the investment classic If It's Raining In Brazil, Buy Starbucks. Peter’s latest book is Always a Winner: Managing for Competitive Advantage in an Up and Down Economy.

Peter is a regular CNBC contributor and has been featured on 60 Minutes.  His internationally recognized expertise lies in his "big picture" application of a highly sophisticated but easily accessible macroeconomic analysis of the business cycle and stock market cycle for corporate executives and investors. He is a Professor at the Merage School of Business, University of California-Irvine and received his Ph.D. in economics from Harvard University.

Professor Navarro’s articles have appeared in a wide range of publications, from Business Week, the Los Angeles Times, New York Times and Wall Street Journal to the Harvard Business Review, the MIT Sloan Management Review, and the Journal of Business. His free weekly newsletter is published at www.PeterNavarro.com.

Stock market trend: Uptrend Remains Intact

Market Pulse

The stock market finished last Friday on a decidedly bearish note – big drop on heavy volume. The question for this week is whether this was simply an aberration attributable to an options expiration day or the beginning of some kind of market correction.If you take both the economic data and the technical condition of the market at face value, then there is nothing to worry about. The upward trend seems firmly in place, and the evidence continues to suggest an expanding economy -- with the latest such evidence being an uptick in the consumer price index in the ongoing steepening of the yield curve.On the other hand, reputable economists like Mark Zandi and Martin Feldstein are forecasting a double dip recession.  While the slowdown hasn't showed up in the daily yet, these economic bears are looking ahead to an end to help for the mortgage market, continued massive budget deficits, and persistently high unemployment. From that, they tease out a recessionary scenario which would be clearly bearish for the stock market. Here is where I stand on the debate.  I am in the Zandi-Feldstein skeptical camp. As loyal readers will remember, my skepticism dates back to my "market top" call in mid-October. Since that time, the Standard & Poor's 500 index has tacked on an additional 6% to the 61% gain between the March low and mid-October.I continue to ponder whether my market top call was simply premature or just plain wrong. Either way, I don't regret called yet at this point. I'd rather lose 6% on a wrong market top call than give away 10% to 15% quickly in a sharp market correction. That's why, while I made a ton of money like most people between March and September of 2009 in the market, unlike most people, I have grown more and more cautious.My caution is now reached the point where I prefer cash to even dabbling on the short side. Of course, as I said in an earlier missive, I also only enter stock positions if I have a long-short pair that I want to use as a hedge.I know this approach won't have a lot of appeal to a lot of investors. However, my philosophy is to make most of your money in the market in the meat of the move when the trend is clearly defined. Although we have a clearly defined trend now, my view is that the meat of the move is already passed us and any further gains at least over the next few months are likely to be relatively small -- while the risk of a correction steadily increases. This is the kind of macro trading that is the antithesis of the buy-and-hold investor.Haiti Buries Huge China NewsWhile a real earthquake hit Haiti last week, a virtual earthquake with far greater implications for the global economy hit American business enterprises in the form of a massive cyber attack by agents of the Chinese government. Please read the op-ed that follows below carefully. It appeared last Friday in the San Francisco Chronicle.One of the great flaws of the American media is that a tragedy like that of the Haiti earthquake can completely knock a story like the Chinese cyber attack completely off the front pages. I see, however, China's cyber attack on American enterprises as a significant historical event. That's why would ask you read the op-ed carefully below and then forward that op-ed to anybody you can, including your elected representatives. In my book The Coming China Wars, I describe in detail China's strategy to become the world's greatest military and economic superpower at the expense of countries like America and countenance like Europe. These damn well time for working Americans to become as well versed in the matters of China as they are in NASCAR and NFL football. It's also long past time for our myopic, money-grubbing politicians to wake up and understand that the greatest job program we could adopt right now in Congress would be trade reform. 

China's war on the U.S. economy

Peter Navarro,Greg AutryFriday, January 15, 2010China's recent cyberattacks against Google and as many as 33 other U.S. corporations open up a dangerous new industrial espionage front in Beijing's war on American business.China's objective was not that of a rogue hacker - to create chaos. Rather, the target was any intellectual property that would give Chinese enterprises a competitive edge - from trade secrets and new technologies to software such as Google's proprietary source code.Chinese cyberattacks are hardly new. China's military regularly hacks into America's defense networks to acquire military technologies. A glaring case in point: the highly sophisticated penetration last April of the Pentagon's $300 billion Joint Strike Fighter project. Chinese industrial espionage, along with other illegal means to acquire American business technology, is hardly new either. For example, an American manufacturer such as GM or Intel that produces in China must surrender some of its technology. Such forced technology transfer is clearly illegal under World Trade Organization rules, but U.S. executives meekly kowtow for a piece of the action.Similarly, on the industrial espionage front, a shadow network of Chinese visitors to American soil regularly troll for new designs, processes, products and software that can be copied or reverse-engineered. The standard joke: What do they call an American patent in China? A blueprint. More broadly, according to the U.S.-China Economic and Security Review Commission: "China is the most aggressive country conducting espionage against the United States." Of course, once intellectual property is stolen and exported, China gains yet another competitive edge - even as China's economy booms and America's goes bust.What's new and alarming about China's latest wave of cyberattacks is the extension of Beijing's flagrant industrial espionage to cyberspace. If the bank accounts, client lists, trade secrets, patented technologies and proprietary software of American corporations are not safe from Chinese hackers, this becomes an issue not only of economic policy but also of national security. Predictably, Chinese government officials deny any culpability. This is supremely disingenuous, given the tight control of China's Internet by its vast army of cybercops and the sophistication of the attacks.At the dawn of this new cold cyberwar, President Obama and Secretary of State Hillary Rodham Clinton must be clear: Any attack on America - from Pentagon hackings and industrial espionage to forced technology transfer and mercantilist weapons like currency manipulation - represents an act of aggression and will not be tolerated. Peter Navarro is a business professor at UC Irvine and author of "The Coming China Wars." Greg Autry is a UC Irvine graduate student. Contact: www.peternavarro.com. 

"Always a Winner" Forecast for 2010-Q1

What's the first quarter of 2010 going to look like for the economy and stock market? How can you trade some of the macro trends? In this week's newsletter, I going to answer these questions using my "Always a Winner" forecasting model.

Because I have a lot of graphics in this newsletter, you will have to download the text. It's quick and easy.
Just click here. It's well worth the read.

For a video version of the forecast, you can visit my page at theStreet.com. Click here for that.

This Week: Sideways Market? Got “Pair Trade?”

Stock market trend: Bullish Trend Turning Sideways

Market Pulse

Last week, market action was decidedly mixed. The Dow Jones industrial average and the S&P 500 were barely up while both the NASDAQ and the Russell 2000 were down. Most troubling is the lack of volume -- the persistent trend over the last month in what may be an aging bull market.In fact, there is an emergent sideways pattern to major US stock market indices that is well worth noting as we stumble towards the end of the year. This pattern is evident in the two-month chart of the S&P 500. Since November 13, this broad market index has basically gone nowhere.

The chart of the Russell 2000 is even more interesting. It suggests that a market top may have been reached as early as the middle of October. At best, this chart evinces a sideways pattern as well.These observations are consistent with the ongoing technical weakness that I have been noting now for almost a month in this newsletter. While sentiment is neutral, both momentum and strength measures suggest a bearish trend reversal.

Both the emergent sideways pattern and the ongoing technical deterioration in the market are a reflection of mixed macro fundamentals. While there is continuing evidence of recovery in the business investment component of the GDP equation, the consumer remains a question mark. More broadly, all forecasts point to a meek recovery in 2010 it that is unlikely to significantly reduce the unemployment rate -- or generate robust corporate earnings.

From a trading perspective, the safest strategy, particularly as we move into the holidays and the end of the year, is simply to move into cash, count your blessings, and conduct research that will position you for some more active trading in the new year when the trend hopefully declares itself more fully -- either bullish or bearish.  If, however, you want to continue to trade this market, you may want to consider a long-short approach such as the one I discussed several weeks ago in highlighting a strategy to trade the IBD 100. (Click here to review)

The least risky type of a long-short strategy is to find two stocks in the same sector or space -- one that is weak that you can short sell and one that is stronger to go long with. This is called a "pair trade." An excellent case in point is offered up in this week's edition of Barron's magazine.

In an interview with Douglas A. Kass, the President and founder of Seabreeze Partners Management, Kass recommends the following pair trade: Short Franklin Resources (BEN) while going long State Street (STT).  In general, I like this trade but only with a properly timed entry using technical analysis.In fact, right now, technical analysis would suggest that Douglas A. Kass is dead wrong. In particular, Market Edge rates Franklin Resources a "buy" while rating State Street a short sell. This is exactly the opposite recommendation of Douglas Kass. Thus, if you were to execute this particular pair trade right now you would be very early to the game, at least on the basis of technical analysis.

That said, I do like this trade possibly over the long term. Looking at the one-year chart of Franklin Resources, you can see a double top pattern that suggests a possible trend reversal. Based on this chart pattern, being early into this trade on the short side may not be that risky.


On the other hand, the one-year chart of State Street clearly indicates the beginning of a strong downward trend in the stock in mid-October. Thus, going long State Street right now would be much more of a leap of faith.

My bottom line here is that this is a good pair trade to put on your watch list. If Kass is right, the technical indicators will begin to point in the right direction and greenlight this trade. It could be big.To end this missive, I'd like to leave you with a quote from the Kass interview that is consistent with my broad view of the market and my concern that a bearish trend reversal may be on the horizon:

"Frankly, it's hard to totally understand what has been propelling the recent market rise, both in scope and persistence. An obvious reason is the Fed's zero-interest-rate policy and its cheap-dollar initiative, which is creating a shortage of available credit domestically and a glut overseas. And while gold and equities rise, this is undercutting domestic economic growth. In a vicious cycle, capital is being deployed away from the US, small businesses and the consumer, and it's pushing our dollars abroad and wasting precious growth capital and assets in commodity bubbles. And renewed optimism in longer-duration assets such as stocks has, in part, resulted in a massive reallocation at large domestic pension plans and endowments. They have moved from fixed income to equities after allowing the ratio of bonds to stocks to rise dramatically by the time the US stock market hit the bottom in March of this year.

Always a Winner Strategies

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  America’s appetite for cheap Chinese goods is as strong as its political will is weak.” 

 

This Week: Grudge Trend

Stock market trend: Bullish Trend Remains Intact

Market Pulse

Grudgingly, I must admit that the market's upward trend remains in place. However, this remains a very difficult market to make money in while the risk/reward still looks more like a gamble on the long side rather than a solid speculation.

The upward trend is consistent with the philosophy of this newsletter. At least in my world, the stock market is a leading indicator of the economy. At least last week, market participants seem to have interpreted the economic news as relatively bullish. The most important data point last week was a sharp reduction in layoffs, indicating a strengthen him ing economy.  This expansionary signal simultaneously boosted the dollar and steepened the yield curve.

Still, all was not rosy. The ISM Manufacturing Index declined by 2.1 points, and this was the second decline in three months.  The significance of the decline in the ISM Manufacturing Index should not be underestimated. Much of the US recovery is being driven by business investment and inventory restocking. If consumers fail to follow through on this investment led recovery, the recovery will stall. That holiday sales have not been particularly robust should be a warning sign.

That said, one should never argue with the tape. What the tape continues to tell us, contrary to my prediction some weeks ago, is that the bullish trend remains in place.

The reason, however, that I am so reluctant to trade on the long side at this point in time is the disquieting jumble of technical indicators, many of which are clearly bearish. For example, of the 91 industry sectors tracked by Market Edge, only a third or rated strong or improving while the remainder are weak or deteriorating.

At this point, I think it is worth pointing out that if you made a bundle off the March lows, taking some of those profits before the calendar year ends and using this time for research and reflection may not be a bad strategy. In my experience, the best and biggest returns are earned in the middle of a bullish trend while most of the money is lost trying to pick tops or bottoms.

As a final comment, I believe that the ability to make money in the US stock market over the next several years will hinge on how market participants interpret a rate of economic growth that will likely be positive but still below potential output. To put this point another way, a recession is clearly bearish for the market and full employment output in a robust expansion is clearly bullish. However, that netherworld between of slow growth is very difficult to handicap. In this regard, we are entering a new phase in our economic history and in modern times, it has been extremely rare for forecasters to project extended periods of slow growth and high unemployment. Stay tuned.

 

 

This Week: Dump the Dow!

Check out an interesting long-short strategy, Trading the IBD 100, at theStreet.com

Stock market trend: Bullish Trend Under Growing Pressure

Market Pulse

My crusade this week is to get financial analysts to stop focusing on the Dow Jones Industrial Average is the most important symbol of the US stock market. In the ticker tape parade everyday on CNBC, I would much rather see the S&P 500, the NASDAQ, and the Russell 2000 rather than the Dow. The Dow is only 30 stocks and most have a lot of international exposure so the index is hardly reflective of the state of the US market. In contrast, the S&P 500 is the broadest measure of the US stock market, the NASDAQ gives us our best snapshot of technology, while the Russell 2000 provides the best glimpse of future growth and productivity as measured by the ability of the small-cap US economy to bring forth innovation.

I am up on my soapbox this week about this because if you have been watching the Dow exclusively, you have been seeing quite a different picture of the market than if you have been watching the three other indices. The fact of the matter is that the Dow has been doing better than the S&P 500, NASDAQ, and the Russell 2000; and in some ways, the Dow's relative outperformance has been lulling the Bulls into a false sense of security. This extended passage from Market Edge provides an interesting interpretation of the Dow as it relates to any confirmation of the market trend:

[T]he DJIA posted another new recovery high while the broader indexes failed to confirm the move. This has been the case over the last three weeks and doesn't bode well for the market going forward. A confirmed high occurs when the DJIA records a new closing high which is accompanied by a majority of the broader major averages also posting new highs. It is especially important that the NYSE A/D line and the number of NYSE 52-week new highs confirm the move. Since closing at 9712.73 on 10/30/01, the DJIA has recorded six new recovery highs. The high on 11/16/09 (DJIA 10406.96) was the closest to being a confirmed high as four of the nine broader indexes followed suit. When the DJIA closed on 11/23/09 at 10450.95, none of the broader indexes posted a new high. Also, the NYSE A/D line is off by over 1600 units from it's high recorded on 10/19/09 while the NASDAQ A/D line is some 8000 units below it's 10/14 high. This divergence is why the Momentum Index is so negative. The fact that there has been six non-confirmed highs over the last three weeks without a sell off is very unusual. It is like stretching a rubber band. At some point it should snap. [Emphasis added]

Given my long-standing concerns about the macro fundamentals of the US economy -- high unemployment, rising oil prices, a housing market still in disarray, looming crushing budget deficits at both the state and federal level, and the debasement of our currency by the Federal Reserve -- and given the bearish technical conditions of the US markets, my strategy remains largely one of holding cash.

That said, at the beginning of the last week when the market popped up on Monday, I "sold the rally" by opening a small short position in TWM -- the ultrashort exchange traded fund for the Russell 2000. Loyal readers will know that this is my favorite shorting instrument because of its volatility and the tendency for small caps to lead the market either up or down.  If the market heads down, as I believe it will, I will add to this position. If the market heads back up, I will simply close my TWM position at my original purchase price and thereby incur no loss -- I'm now playing with the house's money.

I see this coming week as a showdown of sorts. The debacle in Dubai is a fresh reminder of the fragile state of many countries around the world still working off their credit crisis karma. We will get a good look at the consumer spending patterns for the holiday -- we can bearish are strong and bullish. We should also see some resumption of volume in this market. This is important because over the last month volume has been very unusually low.

With the trend remaining a flip of the coin, the best strategy in this market may well be to be primarily in cash. However, I've also come up with an interesting strategy for more aggressive traders that is featured this week in a video I produced for the Street.com. In a nutshell, the "long-short" strategy involves a basket of six stocks drawn from the IBD 100. The long stocks include BUCY, EPAY, and CTRP.  The short stocks include ININ, TNS, and EJ.  Check out the video as you may find this to be a really interesting strategy. This strategy will only work, however, for traders who know how to manage risk, cut their losses, and employ trailing stops.

 

You know the stock market is in trouble when the only explanation for stock price movements is the direction of the dollar. Market goes up -- must be the dollar going down. Market goes down like last week -- must be the dollar firming up.

Never mind how corporate earnings are doing. Never mind whether or not the global economy is recovering. Never mind anything. It's all about the direction of the dollar.

What I find positively stupid about all this is that the logic doesn't work. Suppose you are a foreign investor holding euros or yen or Australian dollars. If you think that the US dollar is going to decline over time because of rising budget deficits and an ultra-easy money policy of the US Federal Reserve, there is no way that you are going to buy dollar denominated assets in the US stock markets. That's just plain stupid.

Suppose, alternatively, that you are a US citizen holding dollars and seek to earn a reasonable return on some type of investment. Given a choice between holding the US market in the form of an exchange traded fund like SPY or buying exchange traded funds of the countries or regions that are likely to see currency appreciation against the dollar, there is similarly no way that you're going to choose investing in the US market.

Well, then, how about all this carry trade stuff? Shouldn't that cause US stock markets to rise? By definition, absolutely not. The whole idea of the carry trade is to borrow US dollars and invest them in higher yielding assets abroad -- not the US stock market itself.

At least from my perspective, all this adds up to a really bad case of spurious correlation. Yes, the dollar has declined by almost 20% since March of 2009 while the stock market has gone up. But no, the dollar's decline can't be the cause of this.

This as an important implication: The observed co- movement of the dollar and US stock prices is likely unsustainable. To repeat, why the hell would anybody in their right mind invest in the US stock market -- that is, dollar denominated assets -- if they think the dollar is going to continue to go down. It makes absolutely no sense.

On this matter, I would love to hear from any of my readers -- or, for that matter, any of my fellow co- contributors on CNBC . Specifically, I would like to hear a cogent argument as to why the stock market in the United States should go up when the dollar declines. And spare me the "law of one price" argument which would argue that all the stock market is doing is adjusting upwards in nominal value to account for the decline in the dollar. This simply doesn't wash because rational actors out in the world would prefer to chase higher returns elsewhere rather than simply tread nominal value water with the US market.

Anyway, that's my beef for the week. I'm tired of hearing all this dollar nonsense without any logical explanation of the alleged effect other than a few buzzwords about "carry trade." If the carry trade were truly lifting the US stock market, the Japanese stock market, which benefited from the carry trade for almost a decade, would be at 100,000 right now.

To close, a few observations on the market trend. Loyal readers know that I called a market top some weeks ago and have thus far have been either dead wrong or just a little ahead of the curve. The truth may be somewhere in the middle as there is emerging evidence of a possible range bound market and a resumption of a sideways pattern, with the top of the range only slightly extended now.

This is a situation that we must watch very closely now. I continue to be mostly in cash -- although last week I dipped in and out of the market with a nice nibble on TWM -- the exchange traded fund that ultra- shorts the Russell 2000. These are the kind of short- term trades that at least keep me on my toes and attentive to the market trend.

Last take: the Chinese government needs to shut its pie hole on the currency question. Over the last week, as the supplicant Barack Obama embarrassed himself in Beijing, Chinese government officials repeatedly attacked the US for its large budget deficits while denying that it's currency manipulation had anything to do at all with weakness in the US economy or the ability of the US to run those budget deficits.

This is just so much Chinese garbage, and it would be refreshing if the Obama administration had the same kind of "ready response" to these criticisms that it had whenever Hillary Clinton attacked Obama during his campaign. It's the first rule of politics -- you don't let a false charge go unanswered. Yet Obama and his clueless lieutenants keep allowing the Chinese to have the upper hand in this trade reform debate when the Chinese government has the blood of the American economy all over its hands.



NAVARRO ARTICLE IN CHRISTIAN SCIENCE MONITOR

November 18, 2009

THE FED IS FOOLISHLY WEAKENING THE DOLLAR

By Peter Navarro

Has America's Federal Reserve become the single greatest obstacle to global economic recovery? Central bankers around the world are increasingly asking this question as the American greenback continues its Fed-inspired decline and damages the export-driven growth of countries from Latin America and Asia to Europe.

Historically, the Fed has responded to economic downturns by cutting interest rates to stimulate domestic business investment and consumer purchases of "big-ticket" items, like automobiles and housing, that are sensitive to the cost of loans. However, in the current crisis, this traditional formula is simply not working.

It's not working in part because the Fed's "solution" has been a concentrated dose of the problem. After years of promoting the easy money and loose credit that fueled asset bubbles, it has responded with even easier money and even looser credit. It's like fighting fire with gasoline.

American consumers are not responding to the Fed's liquidity surge because high employment, high oil prices, bottoming home prices, and stagnant wage growth have squeezed their purchasing power. Business investment has likewise failed to fill the recessionary gap because much of the investment US corporations used to make on American soil is increasingly being sent off shore.

Despite this lack of responsiveness, Fed Chairman Ben Bernanke continues to throw monetary stimulus at the problem - and thereby has created an international dollar crisis now threatening the global recovery.

The declining dollar story is one of weakening demand for, and a massive oversupply of, the greenback. It is a sad and sordid tale scripted almost entirely by the Fed.

During the worst months of the global financial crisis, investors flocked to the dollar as a haven amid the storm. But since March 2009, when economic policy under the Bernanke Fed and the Obama administration became clearer, they have fled the greenback. In that time, the dollar index has fallen 16 percent.

You can't blame investors for selling. By first driving, and then maintaining, short-term interest rates near zero, the Bernanke Fed has made it far less attractive for them to hold dollars.

In a desperate effort to break the back of the credit crisis, the Fed has also engineered the most massive increase in the money supply in US history. Since 2007, the Fed has roughly doubled the monetary base. This, however, is only half of the oversupply story.

The other half of the tale involves the willingness of the Bernanke Fed to help accommodate the rapidly rising, and historically unprecedented, US budget deficits. Such accommodation involves the Fed's willingness to print new money to purchase many of the government bonds being issued by the Treasury Department to finance the budget deficit.

The practical effect of the Fed's easy money policies has not been to stimulate the US economy through traditional channels of domestic consumption and business investment. Rather, it has debased the dollar and thereby, in true beggar-thy-neighbor fashion, helped to stimulate demand for US exports while discouraging imports from the rest of the world. To the rest of the world, this policy seems cynically aimed at bootstrapping the American economy through exports at the expense of its trading partners.

This beggar-thy-neighbor effect is further complicated by the Chinese government's pegging of its currency to the falling greenback. Because of this peg, every time the dollar falls, the Chinese yuan falls with it. The steadily weakening yuan has further boosted the already formidable competitive advantage of Chinese manufacturers in markets across the globe.

In response to sluggish export demand in their home countries and the loss of market share to China, central bankers around the world are beginning to retaliate with large-scale interventions in the currency markets designed to brake the dollar's decline relative to their own currencies. The clear danger is that this tactical retaliation will devolve into a longer term strategy of competitive devaluations that will ultimately pit nation against nation and destabilize the already fragile international monetary system.

Washington officially supports a strong dollar. But its policies suggest otherwise. To avoid this destructive cycle, it is critical that the Fed and the Obama administration find the courage to end easy money and the accommodation of ever-larger budget deficits. This certainly won't be easy, but the road to global economic recovery must ultimately be paved with both fiscal and monetary discipline in the US - not with Great Depression-style competitive devaluations.

Peter Navarro is a business professor at the University of California-Irvine, a CNBC contributor, and the author of "Always a Winner: Finding a Competitive Advantage in an Up and Down Economy."

Always a Winner Strategies

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  America’s appetite for cheap Chinese goods is as strong as its political will is weak.” 

 

This Week: Declare Thyself Ye Bastard Trend!

Stock market trend: Too uncertain to call

Market Pulse

Two weeks ago I called a market top, and the market proceeded to move up.  In response, I covered my net short positions and remain in cash.  I continue to ponder whether I was too early in my call or flat-out wrong.

To ponder this with you, some first principles here: (1) Speculate, never gamble; (2) the stock market is a leading indicator of the economy; (3) Use both technical and fundamental analysis to identify the trend of the market, a sector, or a stock.

On (1), right now, the U.S. stock market remains close to a coin toss on a bullish or bearish direction.  Therefore, a fully invested long or short position right now is a gamble with close to 50-50 odds rather than an intelligent speculation.  Therefore, it is still better to be in cash than eke out a few percentage points either way at the resumption (or break) from trend.

On (2), the stock market remains a gamble because of continued uncertainty over the viability of the economic recovery.  Both Europe and the U.S. face the same issue: Will consumers follow through on a recovery that is investment-led and spurred on by expansionary fiscal and monetary policies?  As this issue resolves itself, the market trend will better reveal itself. 

In the same vein, while both the U.S. and Europe are now officially out of recession with positive GDP growth rates, they face the same issue: How long will growth remain below potential output?  If it is through 2010 and beyond, that’s a tough environment for a bullish uptrend.

On (3), the underlying fundamentals remain a mixed bag.  In the GDP equation, both business investment and government spending are highly expansionary.   Exports remain suspect, however, not just for the U.S. but for most countries around the world.  In this dimension, only China and German seem to be strong net gainers in this dimension.  Meanwhile, as noted above, the consumer is the big imponderable.

As for the underlying technicals, there are several things that define what appears to have been a bullish follow through last week.  First, volume continues to be higher on down days than up days – suggesting “distribution” in the face of an alleged resumption of the bullish uptrend.  Second, it was primarily the Dow where follow through was observed: As Market Edge notes:

Last week saw the DJIA record a series of three new recovery highs culminating in Wednesday's close at 10291.26. However, each of these moves to higher ground were non-confirmed in that the majority of the broader based indexes that we follow failed to follow suit. In fact, the only index that also posted a new recovery high was the S&P 500 when it closed at 1098.51 on 11/11/09. Such non-confirmed moves by the DJIA typically occur at meaningful tops and cannot be taken lightly. … The list of negatives continues to grow suggesting that the recent strength in the blue chips is not only suspect but probably unsustainable.

My bottom line is that I remain skeptical of this market.On other matters, President Obama is in China this week.  The oped below summarizes my views on what is the single most important issue that needs to be discussed.Why Currency Reform is the Most Important Obama-Hu Issue

As the two most important presidents in the world are meeting this week – Barack Obama and Hu Jintao – they must realize this: The pernicious economic co-dependence of the U.S. and China not only threatens the long term prosperity of both countries.  It also threatens to usher in a new wave of protectionism and derail the global economy.

In their co-dependence, China needs U.S. consumers to fuel its export-driven growth while the U.S. government needs China to finance its burgeoning budget deficits. What drives this pernicious relationship is China’s de facto hard peg of its own currency, the yuan, to the U.S. dollar.

China’s hard peg to the dollar finances U.S. budget deficits because in order to maintain the peg (about 7 yuan to the dollar), China must recycle billions of U.S. dollars back into U.S. Treasuries.   Through this recycling process, China has not only become America’s mortgage banker.  China also facilitates a dangerous and unprecedented lack of U.S. fiscal and monetary restraint.

China’s hard peg to the dollar drives China’s export-driven growth because it results in a yuan that is undervalued by more than 30%.  This undervalued yuan acts as a significant indirect subsidy to Chinese exports and a hefty tax on U.S. exports to China.  Working in combination with other Chinese mercantilist practices such as direct export subsidies, the result of China’s hard dollar peg has been both a huge and chronic U.S. trade deficit with China and a collateral loss of millions of U.S. manufacturing jobs.

Manufacturing jobs are critical to long term U.S. economic recovery because they pay more and create more jobs downstream than service sector jobs.  A revival of America’s manufacturing base – impossible until the hard peg is lifted -- is equally essential to spurring the higher rates of technological innovation necessary to boost productivity, wage growth, and the purchasing power of American consumers.

Eliminating China’s hard dollar peg is equally critical for the long term growth of the Chinese economy.  The current hard peg prevents China from developing its own domestic economy because the artificially cheap yuan depresses the purchasing power of Chinese citizens.   However, a robust Chinese consumer is critical to long term growth.  Over the long term, China will no longer be able to depend on increasingly budget-constrained European and U.S. consumers for its now export-driven growth.

It is not just the U.S. and China being victimized by China’s hard peg.  As the U.S. dollar has declined in value and dragged the yuan down with it, Chinese exporters have gained competitive advantage relative to manufacturers across the globe.

In Europe, as the dollar has fallen hard against the euro and taken the yuan with it, Europe’s trade imbalance with China has reached record proportions.  Moreover, sluggish growth is forecast through 2010, in large part due to sluggish exports.

 China’s hard peg has likewise taken a harsh toll on many Latin American countries and their export industries.  The reaction has ranged from capital controls in Brazil to repeated currency interventions in countries from Columbia to Peru to halt the slide of the dollar and yuan.

The case of Peru is instructive.  As the most avowed free trader in Latin America, Peru has opened up its markets and signed free trade agreements around the world.  In the process, as the U.S. dollar and yuan have fallen, Peru has lost 75% of its local apparel and textile market to the Chinese – a key source of employment in a country renowned for its cotton.

Most broadly, the failure of President Obama to directly address the issue of currency reform with China now threatens to usher in a new wave of global protectionism.  Indeed, even as the Obama Administration has twice now refused to brand China a “currency manipulator,” it has approved steel tariffs on key manufactured goods from China such as tires and steel pipe.

In ducking the currency manipulation question, Obama has effectively outsourced trade policy to individual American industries now under siege from China.  The likely result of this “second best solution” to reforming U.S.-China trade relations will be a flood of new dumping complaints from American industries, a dizzying round of new tariffs and countervailing duties, and the predictable retaliation of China. 

The global economic recovery must inevitably stall without the revival of the American manufacturing base, the emergence of a robust Chinese consumer, and the vitality of export industries in countries around the world.  The stall will come all the more quickly if a full-blown trade war breaks out.    For all of these reasons, there is no issue more important than currency reform as Presidents Obama and Hu sit down in Beijing this week to discuss the future.  

Peter Navarro is a professor at the Merage School of Business, UC-Irvine and author of The Coming China Wars. www.peternavarro.com   

Always a Winner Strategies

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  America’s appetite for cheap Chinese goods is as strong as its political will is weak.” 

 

This Week: Top This

Stock market trend: Likely market top reached

Market Pulse

Last week, I called a market top; and the Dow Jones industrial average proceeded to reel off a 3.2% gain. There are a couple of important observations to make about this market action.First, the tape never lies so it's important to be flexible when the market moves in the direction that you do not expect. While I entered last week slightly net short, I had a trailing stop loss on my major short position TWM and as the market rallied, I was able to close that short position and still preserve some my profits from the preceding week.Second, the fact that the market rallied does not mean that I'm ready to give up on my call that a market top has been reached. As we enter this week, the Dow will open at 10,023. This is still slightly below the actual market top, which was registered at 10,092 on October 15. It will take a sustained push through this level for me to give up on my market top call.In this regard, while it's interesting to note that the market rallied last week, the underlying technical indicators of the market continued to deteriorate. This passage from Market Edge is particularly telling:

Seldom is the case that the DJIA can muster much of a rally in the face of the numerous negatives that currently exist. In fact, the only thing that the market had going for it at the start of the week was that all of the major averages were in an oversold condition. The fact that there wasn't much improvement in the technicals last week makes the move suspect and probably unsustainable.

The list of negatives continues to grow suggesting that an across the board decline is still in the cards. The CTI remains negative at -04 as Cycles A, B & C are generating negative values. While a reset is projected to occur in the next couple of weeks, the current configuration typically results in a meaningful decline. The very weak Momentum Index indicates that all of the broader market indexes are down much more on a percentage basis than the DJIA, which is usually a precursor to a market decline. Also, as of the close on 10/30/09, all of the major averages with the exception of the DJIA, had closed below their 50-day moving average for the first time since July. This broad based weakness is also reflected in the number of stocks with a 'Long' Market Edge Opinion, which as of 11/05/09 has fallen to 1772, down from 3029 in late September 2009. Those with an 'Avoid Opinion' have increased to 1523 from 306 in September. Finally, volume on down days continues to outpace volume on up days, which is considered to be negative divergence and yet another bearish condition.

In considering whether a market top has been reached, it's useful to examine which economic indicators the market responded last week positively to. One important bright spot was a jump in the ISM Manufacturing Index. It jumped to 55, which is the highest reading since April of 2006. This was a sign that the ongoing investment-led recovery continues to gather some steam. Moreover, other countries around the world experienced similar improvements in their manufacturing indices.A second indicator that the market responded to was a significant jump in productivity. Conventional wisdom here is that increases in productivity translate into higher profits and therefore into higher stock prices.Equally important was the "dog that didn't bark." A rise in the unemployment rate to double digits didn't seem to faze the markets. It should be noted here, however, that the market probably should've reacted more to this number because that unemployment rate rose despite the fact that the labor force actually contracted. Moreover, the average work week remains at a record low, which means that the US labor force is significantly underemployed -- and therefore not generating as much purchasing power in the form of wages than it otherwise would.Going forward, the same critical question remains: will consumers step forward and begin buying all the inventory that manufacturers are building on the shelves as part of this investment led recovery?  There was at least some optimism in the last retail sales report which was a bit stronger than usual. That said, these cautionary words from the Dismal Scientist website about that retail sales report suggests that the long-awaited consumer follow-through may fall short:Sales growth excluding autos came in stronger than expected, and very few segments reported sales declines. This suggests that consumers are becoming more optimistic about economic conditions. That said, it is hard to see how this level of growth can be sustained. Wage income is not growing appreciably, although declines have ended. Wealth is substantially below its prior levels, although some of the pressure may have been removed by recent increases in equity and house prices. No further tax cuts or increases in government payments are legislated, although past actions continue to support disposable income. Asset income is still falling, although with the recession over, there are reasons to believe declines may be nearing an end. The bottom line, however, is that spending appears to be on a somewhat firmer footing than anticipated. The other thing that was interesting to note last week was a sharp jump in the price of gold. The truly interesting aspect of this jump is the news that the Bank of India had sold a huge sum of dollars in exchange for bullion, essentially betting on a continued weakening of the dollar. It appears that other central banks around the world are likewise dumping dollars for goal; and this goes a long ways towards explaining why gold is in such a strong bullish uptrend.The bigger message here, amidst all the talk about the euro or some other currency replacing the dollar as the world's reserve currency, is it may not turn out to be a currency after all that replaces the dollar. We may, in fact, go back to a de facto gold standard because there is no clear paper alternative to the US dollar. Betting long gold and short the dollar would seem to be a decent bet these days.My bottom line for this week is that my call of a market top remains in play. However, last week's market action eroded some of the foundation for that call; and right now being either long or short the market seems to me to be more of a gamble than a speculation. Ergo, I am now completely in cash and will only get back in the market once the prevailing trend reveals itself one way or the other.In closing, I found a kindred spirit quoted in this week's Barron's and I'd like to share with you that paragraph. These words are from Robert Prechter and he accurately captured the same strategy that I've been advocating in 2009:While the stock market enjoyed a "bear-market rally" after extreme pessimism gripped the market in February, when Prechter says he advised clients to cover shorts and buy, that ended in October. Now, he suggests sticking with cash, as in short-term Treasury bills yielding fewer basis points than the fingers on your hand.Yield can be the worst grounds for an investment decision, he assets. Prechter recalls that in 1981-82, when he argued equities could increase five-fold from the Dow's level of 800, the response was "how can you buy stocks with T-bills yielding 15%?" Now, he contends near-zero on safe cash is better than the chance of minus 40%.

Always a Winner Strategies

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  America’s appetite for cheap Chinese goods is as strong as its political will is weak.” 

 

This Week: Nailed It? Probably

Stock market trend: Likely market top reached

Market Pulse

For the past month, as both market technical indicators and macroeconomic fundamentals have deteriorated, I’ve been warning of a possible market top in my Always a Winner newsletter.  In preparation for that market top, I took my profits from the March run-up by closing almost all my long position.

I say “almost” because the only long positions I have maintained are a couple of penny biotech stocks that move largely outside the business cycle and a GE 2011 leap that I still like in that time frame. 

That said, even though I hung on to that GE 2011 leap, I fully hedged it by shorting actual GE shares.

Last week, I went from warning about a possible market top to calling an actual market top and bearish trend reversal.

Putting my money where my mouth is, I also went to a net short position by buying a significant holding of TWM, the ultrashort exchange traded fund for the Russell 2000.

While I may be wrong about this market top, I’m still amazed at the level of ignorance of many of the commentators I hear on my favorite financial network on which I myself am a contributor – CNBC.

In fact, some of my colleagues are insisting that market drop to end October was simply due to end of quarter profit-taking by mutual funds trying to put their best bottom line forward.

This seems like all so much nonsense when one looks soberly at both market technical indicators and macro fundamental.

Let’s start with the market technicals.  Both strength and momentum indicators for all major U.S. indices – the S&P 500, the Dow, the Nasdaq, and the Russell 2000 are negative.  In addition, key sectors ranging from financials and technology to real estate and communications are showing marked deterioration.

Note that this is a very, very different landscape from just a few months ago when virtually every major exchange traded fund for every major market index both within the United States and around the globe could be considered a strong buy.

As for the macroeconomic fundamentals, the scenario that I raised in an earlier video for the Street.com of consumers failing to follow through on what has been an investment led recovery seems to be coming to fruition. The central problem that consumers continue to face is a lethal combination of high unemployment, rising oil prices, falling home prices, and stagnant wages.

Looking ahead -- as the stock market almost always does -- it's becoming more and more difficult to envision a scenario in which strong robust economic growth in 2010 significantly reduces America's double digit unemployment rate. In addition, we are facing at least 10 more years of historically unprecedented budget deficits that are likely to turn today's dollar into a few pennies in value. That's a recipe for precisely the kind of bearish trend reversal I think we are about to be witness to.

Even though I have now called the definitive market top, for most traders, I don’t recommend going short. This is because stocks tend to fall a lot faster than they rise. What this means is that a trader has to pay even more attention to day-to-day, and even hour to hour, movements of the broad market indices.

That said, as I indicated earlier, my shorting instrument of choice is TWM, the ultrashort exchange traded fund for the Russell 2000. I like using the Russell 2000 because it generally has more volatility than the other major indices.

If you would prefer going short the other major market indices, here's how you can do it.  SH is the shorting ETF for the S&P 500 while SDS will take you ultrashort.  PSQ is the shorting ETF for the NASDAQ while QID will take you ultrashort.  Finally, DOG is the shorting ETF for the Dow while DXD will take you ultrashort

Always a Winner Strategies

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  America’s appetite for cheap Chinese goods is as strong as its political will is weak.” 

 

This Week: Calling a Market Top – Feldstein for Fed Chair

Stock market trend: Inflection Point – Likely Trend Reversal   

Market Pulse

It ain’t over til it’s over, but as a speculating man, I’ve been betting that we’ve reached a market top in the U.S. and that that top may well be signaling the onset of a double dip U.S. recession in one to two quarters. 

Loyal readers will know that I took most of my profits off the table some weeks ago and went to a cash and hedged strategy.   In this next phase, I will hold my long positions in my cycle-resistant biotechs but I am moving cautiously and in small steps towards a net short position on the broad U.S. market to try to capture some of what I believe will be a downward move (TWM is my favorite shorting tool for the broad market). 

That said, I don’t recommend this strategy for newbies – instead, newbies may want to consider simply a cash portfolio until this latest bump in the road sorts itself out.

My bigger fear beyond a new bear market now is a double dip recession.  Increasingly, I believe that the consumer won’t follow through on our investment-led recovery.  I also think that Bernanke’s easy money policy is going to start a round of competitive devaluations globally that will be very destructive.  Already the weak dollar is hurting countries throughout Asia and Latin America, from Columbia and Peru to South Korea and Taiwan – and the central banks in those countries are trying to prevent the dollar from eroding their competitive advantage.

In the old days, Fed interest rate cuts simply stimulated domestic investment and had little ripple effect on the U.S. currency and U.S. exports.  Today, with domestic business investment in the GDP equation increasingly offshored, interest rate cuts do little to stimulate that investment.  Instead, modern Fed policy operates as a U.S. “beggar thy neighbor” policy via the declining greenback.  To reiterate, that beggar thy neighbor policy is inflicting considerable harm in both Europe and Latin America.

If the U.S. falls into a double dip recession – or even continues with very slow growth for another year (or more), that puts a very different spin on a lot of things, including the reappointment of Ben Bernanke.

For the record, reappointing Bernanke is asinine.  He helped create the original financial crisis with loose money. He has mismanaged the recovery.  The “recovery” really isn’t going to be a recovery.

Where’s Martin Feldstein when you need him?  He’s the only economist I know who could assume the reins at the Fed and steer this sinking ship through the dangerous waters we are in.

Memo to Congress: Don’t give the captain of the Titanic another term.

Always a Winner Strategies

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  America’s appetite for cheap Chinese goods is as strong as its political will is weak.”  Note: If you want a trade with virtually no downside risk and an almost certain strong upward move over the longer term, check out my latest contribution to theStreet.com. It offers up a way to speculate on the eventual decoupling of the Chinese yuan from the US dollar.  Click here.

This Week: Market Top?

Stock market trend: Up, Strong Risk of Pullback or Trend Reversal   

Market Pulse

For the last month, I’ve been warning about the possibility of a either a market pullback or bearish trend reversal.  During this time, I’ve moved much of my own portfolio into cash while hedging my long term long holdings (primarily GE leaps).  While the US stock markets have continued to rise, albeit at a slowing pace, technical analysis continues to indicate an ongoing deterioration. As Market Edge writes in this week's Market Letter:

“The technical condition of the market deteriorated once again last week as the Momentum Index remained in negative territory while the Strength Indexes fell further into bearish ground. While the DJIA was posting new recovery highs last week, negative divergences continued to develop suggesting that the move may be suspect. The 14-day RSI, which is a short-term momentum indicator, failed again to confirm the DJIA's recent high. Also, the Up/Down Volume Ratio for most of the major averages continues to lose ground. This indicator, which is a measurement of accumulation and distribution, typically tops out prior to a significant decline. Finally, the market is in a very overbought condition as evidenced by very high stochastic readings and the near record high level of stocks above their respective 50 and 200 day moving averages.”

For those of you who consider technical analysis to be some kind of "voodoo," my view is that there is almost always an underlying fundamental analysis explanation for technical phenomena. The big picture here is that the underlying US economy along with Europe, Canada, Mexico, and numerous other weak spots continue to grapple with high rates of unemployment and the high likelihood of growth rates well below potential output. The latest earnings reports have been mixed at best and have therefore not provided the necessary fuel for a strong breakout above current market resistance levels. The fact that the Dow broke through 10,000 and then fell back last week should at least be a mild warning sign to anyone who thinks this bull market may not be at risk.My broader philosophy here is that it's better to protect the large gains many of us made since the March lows than to give back a significant chunk of that profit by engaging in unprotected trading during a period of high uncertainty when the risk of a pullback or Trend reversal is at least as high as a follow-through on the current bull market.Last take: Check out the biotech penny stock DUSA.  It just broke through a major level of resistance and is poised for a possible upward move. Trading the Dollar/Yuan PairIf you want a trade with virtually no downside risk and an almost certain strong upward move over the longer term, check out my latest contribution to theStreet.com. It offers up a way to speculate on the eventual decoupling of the Chinese yuan from the US dollar.  Click here.

Stock market trend: Up, Seeking to Break Through Key Resistance Levels 

Market Pulse

Last week, my market pessimism got run over by an Australian rate hike as the U.S. stock market shook off a two week slide and powered up another notch.  Once again, the key resistance level of 10,000 on the Dow is in sight with the Dow’s 4% gain last week.

Since Australia’s rate hike was such a catalyst for that mini-bull run last week, it’s worth understanding the bullish logic behind.  The logic hinges on the argument of Australia as a bellwether of recovery and reflation in the broader global economy.   To put this in more concrete terms, if Australia needs to raise interest rates, it must be growing robustly and if its growing robustly, other countries in the region must be growing as well.  It follows that if Asia is growing, the rest of the world must follow.  Ergo, global markets shall boom.

Let’s try on the bearish counterargument, however, for size and see whether the bullish or bearish shoe fits.

In truth, Australia has become one of China’s most important “commodity colonies.”  Down under is merely as extraction pit for the coal, ore, and other raw materials needed to fuel China’s factory floor.  Since China has undertaken the most massive and effective fiscal stimulus of any major economy and since its growth has been well above projections, it’s no wonder that one of its most commodity colonies is booming too.  However, it doesn’t necessarily follow at all that the rest of the world, or even the rest of Asia, will be booming as well any time soon.  In fact, the big danger is a collapse in what some are describing as an emerging bubble in China.  Ergo, global financial markets won’t be booming anytime soon.

Perhaps the best argument for the longer term bearish interpretation of Australia’s “canary in a China coal mine” moment on the world financial stage is this observation from Market Edge about last week’s allegedly bullish move:

“The technical condition of the market deteriorated once again last week as the CTI lost another point, the Momentum Index, which gained some ground, remains in negative territory and the Strength Indexes fell into bearish ground.   Despite last week's broad based advance, the negatives still outweigh the positives at this juncture suggesting that the market is vulnerable for a setback.”

I remain primarily in cash with a hedge on my long positions to see how the “Pisani Paradox” is ultimately resolved.  Only when we break through key resistance levels and the fundamentals improve will I try to leverage the current up trend.The next few weeks will help clarify the picture as its “earnings season” once again.  Just remember here to ignore actual earnings and focus primarily on how companies are “guiding” for the next few quarters.

Always a Winner Strategies

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

 

 

Stock market trend: Topping 

Market Pulse

Last week, I indicated that moving to cash or fully hedging your long positions was an appropriate strategy until resolution of what I referred to as the Pisani Paradox. That paradox refers to the bearish sentiments of many Wall Street traders who, despite those sentiments, had remained long to take advantage of an upward trend they really didn't trust.

As I indicated last week, and it is well worth repeating, the problem facing our economy and financial markets is that we are in the midst of a recovery being propelled artificially by a massive and unsustainable fiscal and monetary stimulus.  Yet, despite the current upward trajectory, even the best projections show very high employments rates through the end of next year.  In addition, most economies around the world will remain below potential output through 2010 while racking up massive budget deficits and inevitably contain the seeds of economic destruction.

Well, so far so good on my call to cash/hedging as the markets clearly had a tough week. During that week, my preferred hedge, the UltraShort Russell 2000 ProShares exchange-traded fund, rose by nearly 10%.

 As I indicated last week, and this, too, is worth repeating, I like using TWM because it has more volatility the instruments one might use to short the Dow or S&P 500.  I also like using the UltraShort feature because I can buy fewer shares to achieve my desired hedge.

Now that I'm in the green on this trade, I have put a trailing stop in place to make sure I don't give it all back. Of course, I would refer that the market remain in an upward bullish trend. It's a lot easier to make money in that environment, as evidenced by the last six months. However, if you follow this column, you are macro trader, and you know that you must simply take what the market gives you -- or the market will be taking what you give it.

Anyway, it may as yet be premature to write off the 2009 bull market. However, the technicals of this market are clearly deteriorating in the face of fundamental realities. In this regard, one of my favorite informal stock market indicators of a topping trend is the number of upgrades on the Market Edge website. On Friday, that number was less than 20 when it is often 50 or more daily during a bullish move.

Now for a few short takes:

First, Barack Obama should've known better than to put his capital on the line pimping Chicago as an Olympic site. Many of the people of Chicago didn't want it anymore than the Olympic Committee. More to the point, as a poker player, Obama should've clearly understood that the smart money was on Rio de Janeiro for two reasons. One is that South America had never hosted the games. Two is that there still is plenty of animosity towards the US and picking the giant behemoth over emerging Brazil was unlikely. He just looked weak and stupid and air again all the same time -- positively Bush-like his naïveté.

Second, and speaking of weak and stupid, Obama's shredding of his presidency early in his term by mishandling his healthcare initiative tops even the Clinton debacle that led to the rise of Newt Gingrich and his "Contract with America." The Democrats better hope that 2010 doesn't shred their majority in both houses of Congress. Even in the best case scenario, by 2010, the Democrats will not be holding a 60 seat supermajority in the Senate. (I like Nancy Pelosi is a person but as a House Majority leader she's been a total disaster. She needs to be replaced by a tough talking, middle-of-the-road pragmatist like the guy she beat out -- Steny Hoyer.)

In this regard, these observations are not partisan in any way shape or form. Bush left this country with the worst economy and largest trade deficit in our history. People on both sides of the aisle expected better from Obama. Instead, he is likely to leave us with the largest budget deficits in our history without solving our economic problems. If he has any sense, he will drop everything on his legislative agenda that doesn't pertain to the short and longer-term recovery of our economy. Talk less, do more, please get off the tube for a while. (Joe Biden needs to go is his vice president as well. What a freaking disaster.)Navarro on TheStreet.com

Always a Winner Strategies

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

 

 

This Week: The Pisani Paradox

Stock market trend: Up But Tired 

Market Pulse

[Thanks to all of for buying Always a Winner last Friday.  You helped the book make the Top 100 in business and investing books!!!]

I had the great pleasure of meeting one of my CNBC favorites last week at a conference, Bob Pisani.  What I love about Bob is his opinion-free market analysis that is based on facts rather than rants.

What struck me in my conversation with Bob was a paradox that has been bothering me.  He indicated that while many of the traders he talked to were bearish, most of them had long positions because that’s the direction the market was going.

I’ve been dealing with this same paradox.  I look at all of economic fundamentals and I see a general improvement globally and a lift out of the recession.  I look at all the technical indicators and virtually everything is pointing up rather than down.  Yet something still bothers me.

I think I may have figured out the Pisani Paradox.  The problem is that we are in the midst of a recovery being propelled artificially by a massive and unsustainable fiscal and monetary stimulus.  Yet, despite the current upward trajectory, even the best projections show very high employments rates through the end of next year. 

Worst still, while GDP growth rates are heading into the positive, few countries other than China and maybe India can look forward to growth rates that are at full potential output for any sustained period.  That means a slow growth recovery, which can’t possibly be bullish.

On top of this, many countries – including the U.S. and most of the Eurozone – are dramatically increasing their public debt to GDP ratios; this will create enormous pressures on interest rates down the road and constrain both fiscal and monetary policy.

I add all of this up and come to the conclusion that resolution of the Pisani Paradox likely lies in a range-bound market for several years that only the most nimble of traders will generate robust returns from.  The question of course is whether we are now reaching the upper end of that range.

I, for one, have begun to take some significant defensive measures.  Never one to be greedy, and after the best six months I”ve ever had in the markets, I have now closed all of my positions in cycle-sensitive stocks save my GE 2011 12.50 leaps.  However, for now, I have hedged those leaps with a short on GE stock. 

In addition, to hedge my other holdings (primarily biotechs), I have put on my favorite market hedge, TWM.  This is the UltraShort Russell2000 ProShares exchange-traded fund,

I like using TWM because it has more volatility the instruments one might use to short the Dow or S&P 500.  I also like using the UltraShort feature because I can buy fewer shares to achieve my desired hedge.

I have set stop losses on both of my hedges at levels which would indicate a breakout for the market over the resistance levels currently being encountered, e.g., Dow above 10,000.

My bottom line is that the best way to make money in the market is in bursts that leverage the trend.  Right now the trend is up but tired and I want to give my capital a well-earned rest and breather from risk.  And down the line, we will see if the Pisani Paradox was really a paradox or simply skitterishness on the part of traders who can’t accept a bull market.  Either way, I’m hedged for now.

AND thanks again if you bought Always a Winner.  If you haven’t yet, please do buy the book this weekend and keep it in Amazon.com’s Top 100 list.  I guarantee you will profit from the book.

PLEASE MARK THE DATE: On September 25, I hope that all of my loyal readers will go out and buy my new book “Always a Winner” on Amazon.  The goal here dear readers is to see if we can together move the book up to the top 100 on Amazon.  It shall be a grand experiment and I do hope you will pony up the few bucks it will cost.  So please mark the date!

This Week: Gee, Let’s Buy GE Options

Stock market trend: Up 

Market Pulse

It always nice when the market geniuses catch up to one of your trades.  Case in point is the action last week in GE call options and the follow-up article in this week’s Barron’s (“A Bullish Sign for GE).  Back in late February just as the market was approaching its March low, I put indicated in the newsletter that I was stocking up on GE 2011 leaps.

My reasoning at the time was that economic recovery was likely, that GE was grossly undervalued because of the drag of GE Capital on its balance sheet, and that when recovery came, GE would like enjoy a very strong move.  In addition, the beauty of buying GE as a market proxy is that, unlike buying SPY (the ETF for the S&P 500), GE also offers some hedging against a falling dollar because of its international operations.  Of course, the logic of buying GE leaps rather than GE shares was that I could limit my losses AND control a lot more shares with a lot less money.

What amused me about the Barron’s story is that the reporter Steven Sears remarks that “the bullish options angle…is new” and that “normally, the industrial conglomerate’s options were used to hedge against a decline in the stock.”   Well, new to the newbies maybe but not to this column’s readers.

Switching gears, a few brief words on the upcoming G-20 summit in Pittsburgh may be useful.  The big question is what will Barack Obama says to China’s President Hu Jintao.  Maybe something like: “How the Hankook are you?”  I’m referring of course to the tire tariff blowup last week and what this might mean for trade reform with China.

Will we get Mr. Obama in the conciliatory kowtow position begging for Mr. Hu to finance our budget deficit?  Or will Barack, in the vernacular of the street and now primetime television, “grow a pair” and challenge Mr. Hu to stop manipulating the Chinese currency and to end China’s massive mercantilist export subsidies.  What’s at stake is the viability of any long term recovery.  Without a rebirth of cities like Pittsburgh and Detroit and Akron in the manufacturing arena, Obama will be a one-term president providing over a slow-growing former superpower eating Chinese dust (and breathing its polluted air).

Last take: Let’s get the hell of Afghanistan.  (More to follow on this.)

Always a Winner Strategies

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

 

This Week: October Crash

Stock market trend: Up. 

Market Pulse

We survived the brief market pullback so thus far September looks a bit safer than in previous years.  The big question hanging over this market is whether the investment-led recovery will be given legs by a revival of consumption.  The jury remains out on this as consumers are clearly saving more and undergoing an interesting transformation from spendthrift bubblemeisters to far more thrifty families.  The danger is that we may catch Japan’s “paradox of thrift” disease: Japanese citizens have been so paranoid about the economy that they never spend enough to restore robust growth to the Land of the Setting Economic Sun.

For a more detailed analysis of whether consumers will fail in the follow-through and lead us into an October stock market crash, I strongly urge you to view my latest video at TheStreet.com.  I do these videos in lieu of the lengthy newsletter at least partly because it’s a lot easier to add chart content to the video.   I guarantee that if you view this one, you will learn a lot about how to forecast the stock market trend.  Click here to view October Crash at TheStreet.com.  Do let me know what you think.

 September Sector Check

Stock market trend: Up.  Watch for pullback

Market Pulse

This week’s newsletter must be viewed as a video at theStreet.com.  In that video, I do a very interesting September “sector check” to handicap the prospects that a likely September pullback will spell the end of the 2009 bull market (The data says no.)   CLICK HERE to view the video.  Do let me know what you think!   

Video link for cut and paste:

http://www.thestreet.com/video/10592467/septembers-sector-check.html#36337362001