The Energy Sector 07-31-10

Since I wrote about this in my comentary I thought that it might pay to do a little work in that area.  Let us start with the XLE.  The energy ETF. 

The XLE closed at 53.84 on Friday.  There is currently downside pressure being applied to price.   Price is oscillating on either side of the short cycle price objective at 53.78.  Price has to go through the entry price for the down cycle to start at 52.67 and the first price objective for that move should be 50.63.   The longer cycle up has a price objective at 57.60 and for that move to restart price would have to go through 54.97 with the first price objective at 56.49.  So right now it looks like there is a little more work to be done before things are clearer for this sector.  Then it becomes a question of Coal, Oil or Natural Gas.  Or could it be all three and what about the transportation necessary to move those products?

Commentary 07-31-10

The argument can go on as to whether we are in a deflationary or inflationary cycle at this time.   It really doesn’t matter to investors or traders.  What matters is whether one can make some money in the markets.  Yes, there is 10% unemployment based upon the governments numbers.  I don’t really believe those numbers, but let us use those for now.  If that is the case then 90% of the population is still employed and they are able to buy all the items they need to exist, go to work and take a vacation.   Even after lowered earnings estimates the fact remains that businesses that are managed correctly are making money.   There are over 100 banks that have gone belly up this year and this week 3 more were added to the list.   Job creation comes when people can borrow money to build a business.  Small business is the backbone of job creation and yet the only people who are creating new jobs are those large corporations that pay minimum wage.  If you are investing or trading there are two scenarios that are in play right now and it appears that both are taking place at the same time.  Inflation is taking place in many areas and deflation in others.  In my area employees are striking or staging sick-outs in order to keep their benefits and wages.  Local and state governments are fighting budget deficits that are growing at a rate that is faster than they can handle and budgets can not be balanced.  Only the fed can print money to pay its debt and buy its own debt.  It is estimated that over 500,000 state, local and federal jobs will be lost in the coming year.  Let us take just one area and look at it rather than try to decipher all the cross currents at work at this time.  What can you expect now that the Yuan has been allowed to rise?  Going back in history to the last time that happened and looking at what sectors were affected the most.  From what I have read the oil and energy sector rose over 100%.  So how true can the rumors be that oil will reach $300 a barrel?  The other sector that rose almost 100% was basic metals.  So if China remains one of the largest supplier of goods to the US and its economy keeps growing at near double digits they will need the natural resources that will allow it to grow.  The other thing is that China’s labor force is striking for higher wages.  The demand in China for goods and services is growing as its economy grows.   Therefore the cost of goods that we import will go up in price.  As the deflationary pressures are being applied to the US economy there will be inflationary pressure on many consumer goods brought in form other countries, especially China.  As entitlements grow in the US there will be a greater need for the government to increase its income in order to pay the increased costs of a system that is becoming more and more socialist in nature.  Will we get a rise in income taxes?  Will congress pass a VAT tax?  Local governments are raising sales taxes now to overcome part of their deficits.   Can the federal government be far behind?  When I traded on the floor my income was classified as unearned income and was subject to a 70% max tax.   Are those days coming back?   Just how far down will the US dollar go in order for the government to pay its debt with a lot cheaper dollars?  How high will interest rates have to go in order to entice others to invest in our debt?  Once the inflationary cycle starts how high will interest rates have to go in order to stem its damage?  How long will the fed be able to funnel untold sums of money into the system that until now have proven to be of little help to the majority of the unemployed and those about to lose their homes?   Has the stimulus really done the majority of the population any good or did it only benefit those who made the largest contributions to the various political campaign funds?   There are far more questions right now than there are answers, but there are two areas to look at for investment.  Energy and basic materials.

Just some thoughts from an old man.

The December Gold Future (GCZ0) 07-29-10

The future is trading now at 1169.50.   There is still downside pressure being applied to price.  The indicator is in the over extended area of the chart.  Price has found temporary support at the first price objective for the retracement down at 1154.   Price has gone through the entry price for the move up at 1184 and then started to retrace the up move.   The first price objective for the move higher remains at 1320.   To restart the move higher price would have to go through the short cycle entry price of  1214 and then the first price objective for the move would be 1271.  ( This move is not shown on the chart)

The S&P 500 ETF (SPY)

The Spyder closed down 0.54 today at 110.29.  The low of the day was just a couple of ticks away from the entry price for the retracement down.   The first price objective for that move would be 106 +/-.  There is currently downside pressure being applied to price.  The second price objective for the move up at 112 continued to act as resistance.   A move down would create a target price at about the 101 level. 

The Dow Jones Average (INDU) 07-29-10

The Dow closed down 30.72 at 10467.16.  It was a hectic day for both the bulls and the bears.   First thing out of the box the INDU rallies 70 to 80 points and then proceeds to go negative by 60 to 70 points.  There was almost a 200 point range today.   After being down 60 plus points the market rallied to plus 30 and then faded to minus 30.  There is still downside pressure being applied to price on the daily chart.  Price has not hit the entry price for the move down at 10,331 and the first price objective for that move would be 10,084.  Once again the second price objective at 10,600 acted as resistance.  There should be some more volatility tomorrow when the GDP numbers come out.

The SPY and INDU for 07-28-10

Yesterday’s charts remain the same as far as entry points and price objectives.  The only thing that has changed is that the Pressure has turned down.  For the first time in 7 days we have downside pressure being applied to price.   This could project to a 4 point drop in the SPY and a 400 point drop in the DOW.  Of course the entry prices for the down move have to be hit and that hasn’t happened yet.

Inflation, Deflation or Slow Growth 07-27-10

There is something going on here that doesn’t really ring true.  One has to look at all sides and try to make some sense of the current situation.  The country has a published unemployment rate of over 9%.  The unpublished amount is probably closer to 18% if you include those that are no longer receiving unemployment benefits.  The number of families on food stamps has increased dramatically. We have a housing market that is still in disarray.  We are getting great earnings reports based upon extremely low expectations.  The majority of those earnings are not due to increased business, but due to plant closings, labor reductions and cutting overhead expenses.  48 of the states are technically bankrupt and raising taxes in order to overcome huge deficits.  In my area the cities are raising sales tax to 9.75% or 10% in order to meet current reduced budgets.  My county already has a 9.75% sales tax and they will be laying off police and closing fire stations.  The school year has been cut and many schools have cut sports and after hour activities.  With an economy that is 70% consumer driven where will the impetus come from to drive growth? 

The inflation story reads like an open book.  The government is printing money like it going out of style.  The question is whether they will run out of ink or paper first.  There is a national debt that is over $1.4 trillion dollars and that amount  is what is listed on the books.  What is off the books could be triple that amount.  How will the government be able to pay off that debt or even pay the interest on that debt?  They can raise taxes because their income has been substantially reduced.  Or they can print more money to pay that debt.  How much of the debt has been monetized?  The government printing money to buy the bonds.  The TARP funds, housing tax credits and all the other stimulus packages along with extended employment benefits do nothing but increase the deficit and reduce the government’s income.  So to pay off the debt they must devalue the dollar to the point where they are paying about ten cents on today’s dollars.  You saw what happened to Germany in the 1930s when they did exactly the same thing to pay their WWI reparations.   Along with that, almost everything you buy in the stores and in the market is produced somewhere else.  The upward revaluation of the Yuan will increase the cost of all goods from China and the devaluation of the dollar will add to the cost of all other imported goods. 

Now let us look at the deflationary side of the coin.  Everyone is aware what happened to Japan.  Their stock market went from a 35,000 high to about an 6000 low and then came back to its present level of around 9000.  So deflation can be as devastating as inflation in a different way.  During a deflationary spiral prices fall.  That seems good for the consumer, but it devastating for business profits and then come the cuts in labor and payrolls.  That once again hurts the consumer who is the one thing that is driving this economy. So what happens?  Consumer buying power is eroded which leads to more pressure on prices, wages and the labor market.   The spiral then continues to erode profits and that is what drives stock prices. 

Where we will eventually end up no one really knows.  The question becomes how do you protect yourself  no matter which senario takes place.

Didn’t mean to get so wordy.  the Dow and SPY analysis follows.

Where would the inflationary pressure come from.  I have heard and read about crude oil going to $300 a barrel and gold anywhere from $2000 an ounce to $8000 an ounce.

The S&P 500 ETF (SPY) 07-27-10

The Spyder (SPY) closed the day at 111.55 down 0.01.   There is still upside pressure being applied to price and the indicator is in the over extended area of the chart.  The chart pattern is about the same as the INDU.  The price objective at 112 seems to be acting as resistance to price moving higher.  For price to start a move down it would have to go through 109.  The first price objective for the move down would be the 106 level. 

The Dow Jones Average (INDU)

The Dow closed at 10537.69 up 12.26.  There is still upside pressure being applied to price.  The indicator is still in the over extended area of the chart and with all that pressure price still couldn’t take out the previous high.   The lower time frames have downside pressure being applied and there is divergence at the highs for those lower time frames.   The price objective at 10,597 seems to be acting as resistance to further upside movement in price.  For price to start a retracement lower it would have to go through 10,332 and then the first price objective would be 10,082.   The 10,000 area has proven to be support in the past. 

The Markets 07-26-10

Nothing much has really changed from this weekends posts.  There is still upside pressure being applied to both the SPY and the INDU.  The indicator is entering the over extended area of the chart.  Any bad news or perceived less that good news could cause a sharp drop in the markets.  We are still  in the middle of earnings season so anything can happen.  The fundamentals don’t justify this run in the market.  So far this year over 100 banks have failed.  The rise in the valuation of the Yuan will do nothing but increase prices here.  The employment numbers don’t look good and companies aren’t spending the stockpiles of cash they are supposed to have.   For all the upside pressure being applied price has really not risen that amount.  One thing for sure,  don’t fight the tape.  It could get very costly.