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Wednesday, April 17, 2024

Monday Market Measurement – Just Right?

Welcome to dead center! 

We are finally back to the middle of our predicted trading range.  It's the range that our 5% rule predicted since October of 2008 so we're hardly going to be shocked to be here now.  Usually we are shocked when we're NOT in our range.  I detailed the movement this weekend in our 5% Rule Update, so I won't get into it all here but let's just focus on our short-term chart and embrace the uncertainty as we move back to the middle of our range at 1,100

I say it all the time and I'll say it again:  I'm not bullish or bearish – I'm rangeish.  That means I get more bullish at 5% under our line and I get more bearish at 5% over our line and I get extremely bullish or bearish as we get into that 10% zone because – if the market fundamentals don't change – then my midpoint doesn't change and the opportunity is to play us to return to "reality" at S&P 1,100 (Dow 10,200). 

Just look at those nifty little resistance points we have to watch now – the 200 dma is at 1113 and the 50 dma is at 1,084 and we just ran up from 1,030 (we ignore spikes) past the 5% rule at 1,081, which just so happens to be pretty much the 50 dma so that will be our key test for the week as our bottom to top run from 1,101 to 1,102 is close enough to 10% to merit a 2% (20% of the run) pullback back to, WHOOPS!, 1,080.  So 1,080, 1,080 and 1,080 is our line in the sand for the week.  If the rally is real, the number will hold and, if it doesn't hold (especially with all the earnings and economic data we have coming in) then we have to look at the drop from 1,220 to 1,020 (200 points) and consider the move back to 1,120 nothing more than a strong, 50% bounce back to our mid-range. 

We are past the EU Stress tests but JPM says 54 banks should have failed for the following reasons:

  • Lack of rigour in macroeconomic stresses, leading to low virtual portfolio loss rates
  • Sovereign haircuts were applied only to trading books and not to accrual books
  • JPM estimates show that the lack of rigor in CEBS stress scenarios resulted in a 1.7% upward bias to Tier I capital ratios
  • The focus on Tier I (not core Tier I) resulted in a 1.2% lower capital hurdle for a total bias of 2.9% in Tier I capital ratio estimates

Eliminating this bias suggests that 54 banks would have failed a more stringent stress test, generating a capital shortfall of roughtly $100Bn and JPM believes that the stress test results will fail to restore financial confidence, leading to lower yields, wider spreads, lower EONIA, and a flatter EONIA curve.  That remains to be seen, of course.  Clearly our markets over-reacted to the "good" news of the stress tests on Friday and we took the money and ran on that crazy 150-point jump that took us over 10,400.

My comment to Members in our Chatroom at 3:03, when the Dow was peaking at 10,440, was: "From 9,700, 10,670 is up 10% and if we throw out that idiotic spike down and look at the 10,000 mark, then 10,500 is our 5% rule and from there we very much expect a pullback to 10,400 anyway (and 10,470 would be pullback off the 10% run) so, at 10,425 on a Friday, there’s very little reason to believe we’re going to miss anything by cashing out short-term bullish plays here."

That led us into the weekend neutral, expecting a challenge getting over that 1,113 mark (about 10,500) even if Europe and Asia decided to have a party.  As it turns out, they have had a pretty subdued move today with the Hang Seng flat (but dropping 120 points off a gap-up open), The Shanghai up 0.65% and the Nikkei holding 9,500 (barely) on a 0.77% gain but the BSE fell 0.6%, back to the 18,000 line and we REALLY don't want to see India stalling out here.   

The EU has been very disappointing as they have given up 0.5% gains this morning to drop 0.2% ahead of our open on no particular news.  It was a very slow weekend for news in general but I did notice that Commodity Traders have increased their bullish bets by 50% in the past two weeks so SOMEONE is bullish on an economic recovery taking hold.  This is the most bullish commodities have been since April 9th, when oil was $87 a barrel.  Now oil is $78 and it will NOT be good for the still-weak recovery if we pop back over $80.  I was hoping we could rally the markets and rotate funds out of commodities and into stocks that actually hire people and build things but that's not happening and that means we are going to take this little "recovery" with a very large grain of salt.

We'll see New Home Sales at 10 am and get Case-Shiller tomorrow at 9, followed by Consumer Confidence at 10 (probably low).  Wednesday we have Durable Goods at 8:30, Oil Inventories at 10:30 and a very critical Beige Book at 2.  Usually the Beige Book data is collected 10 days back so that will take us through mid-July and should prove telling (we liked the last BBook).  Thursday is the usual 450,000 jobs lost (yawn!) and Friday we have our Q2 GDP (3%) and the Chicago PMI (more deflation?) along with University of Michigan Consumer Sentiment at 9:55 so fun, fun, fun on the data front this week along with about 200 S&P earnings reports – no wonder we're sitting on the fence! 

While all but 7 EU banks may have passed their stress tests, 7 US banks got so stressed out they failed on Friday, bringing the year's total up to 103.  The good news is that that reduces the number of banks on our "Problem Bank List" 1%, now below 800 at "just" 792 troubled US lenders.  Are we really 100 times worse than Europe or is Europe's stress test even more of a farce than ours was? 

Our futures moved higher after FedEx raised Q1 and full-year guidance, overcoming a sharp drop in the Chicago Fed Index and ahead of housing data to be released at 10 am – if we can get past that, we can move higher but we're just going to be hanging out watching our levels, although it does look like our focus short for this week will be FSLR – I had wanted to wait but Barron's blasted them this weekend (rightly so!) and I think $140 may be as good as they get before we short them. 

Time to have some fun! 

 

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