For the last few weeks the equity markets have been stuck in a very choppy trading range. However the market has formed a pennant formation and its nearing the tip of the formation.
This formation would imply a breakout is nearing, but will it be to the upside or downside? In the past few weeks, our signals have been mixed, thus showing their is confusion in the markets. We do have some longer term overbought signals and short term signals calling for a bottom nearing.
As the world appeared to be melting down in February and early March, a behavioral perspective would indicate almost any kind of good news became great news. Now that the economy is starting to show some stability, more solid news is needed to prove we are moving forward. As we noted in an earlier comment, confusion has been the name of the game as we have been getting better than expected and less than expected reports. This past week has been no exception to the choppy action. For instance today at 8:30 am, the Q1 GDP preliminary number was released and it showed a better number than was originally released, but not as good as expected. Original report was -6.1%, Market expected -5.5% today and it was reported at --5.7%. The GDP deflator reported 2.8% and near expectation of 2.9%. At 9:45 am the the Chicago Purchasing Manager's Index was released with an expectation of 41 and it was reported at 34.1. At 9:55 am Michigan Consumer Sentiment index was reported better than expected at 68.7. The market expected 67.9. So what's a trader to do?
From a technical aspect, it would actually be healthy to see the market break to the downside to about 7,700 with a first level of support around 8,000. The market would do its consolidation thing, cleanse itself and then make a move towards 9,000 if more stronger economic reports are released.
Keep that seat belt on, more turbulence may be ahead before we land.
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The month of May started off as continuation of the rally that bottomed on 3/6/09. However, as the rally became tired and showed more signs of oversold, its taken on the personality of a yo yo or as some would say, a drunkard's walk. Due to the Memorial day holiday, the Crop Progress report was released today. Once again, the report suggests a bullish sign for soybeans and spring wheat. Corn continues to get closer to its 5 year average. This can be seen as corn has recently been caught in a 12 cent rally, while wheat and soybeans (especially soybeans) continues to rally. Today the April Housing Starts report and Housing Permits report were released at 8:30 am (EST). On first view of the headline news, it appeared relatively negative as the market was seeking an increase in both reports. Instead both reports announced negative statistics and actually reached record levels of the last 50 years of data. After the markets closed today, the USDA released their latest Crop Progress Report for planting. As this planting season has been hit with a lot of rain, the farmers have found it difficult to plant for this season in a timely manner. The below stats are still showing bullish figures for the grain markets. Although corn seems to be getting closer to where it should be at this time of year. Soybeans and wheat are still far from where they need to be. If overseas demand should increase and planting doesn't near the usual percentage, we could see much higher grain prices later in the year. Stay tuned. On 4/29/09 we received a buy signal in the Canadian $ (CD) futures contract (basis the June contract). From our signal the market rallied about 400 points to its high on 5/11/09. As a commodity related currency, its not a surprise to see it bottom in early March and then rally along with many commodities. On 5/10/09 we noted the equity markets may be nearing a short-term top as our pricing models were converging between 8300 and 8700 in the DJ June contract. On 5/7/09 the market made a top and since has given back about 300 points as of this writing. Since reaching the lows on 3/6/09 to the high on 5/7/09, the equity markets have rallied (basis DJ June futures contract) almost 34%. Not too shabby for a two month rally. On a technical basis, we are beginning to see some indicators showing overbought in conjunction with several of our pricing ranges converging between 8300 and 8700. Since first writing about the S-ratio in the paper "Skewing Your Diversification", we have received a number of questions on this ratio. Many have agreed that its an interesting way to look at volatility and skewness simultaneously. Very soon, we will be writing more on this topic to give a better understanding about the ratio. In the meantime, you can read about this ratio in the paper "Skewing Your Diversification". From the USDA planting progress report of 4/27/09, the data showed that many of the markets are lagging behind the 5 year average of planting progress. Weather has also played a part in the market's recent rally. With the heavy rains in recent weeks, its been difficult for farmers to plant. If heavy rains continue after planting has occurred, than there is risk for flooding the fields. This could support higher prices of the grain markets even if the global economy remains negative to flat. The bullish bet on grains is for the planting progress to still be below the averages. The next USDA report will show if this is true or not. |
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