The MJ Journal

Dubai Effect

Dubai broke, as expected. It is asking an extension of 30 billion credit payment that shook the world’s market last Wednesday.

What would be the effect of Dubai’s debt crisis?
I think the most important would be the power shift within the UAE (United Arab Emirates). Dubai would accept its own screw up and be quiet for a while, while the oil rich Abu Dhabi would become the domnant ruler of the UAE.

As to the US stock market, I believe the effect should be short term and limited.
However, this crisis does remind us once again: Hardware is cheap. It is Software that would last and prosper.

Wait for the correction

Attached is the S&P 500 weekly. Since S&P broke out of its reversal head and shoulder pattern, it has moved higher and higher.

 

What has been the force that propelled this rally? I think it is the Fed zero interest policy. Money tends to flow to places of higher yield. When there is absolutely no interest to earn in savings accounts, and US dollar ‘s future is in doubt, the temptation to get into the stock market is obvious.

Stock moves in waves, though.

If 8% is significant money to you, I would wait for the correction to put the new money in.

A problem that money can not solve

After 9/11 attack, Greenspan flooded the world with US dollars in an effort to avert a whole blown economic disaster. He succeeded.  Not only the US staged a two fronts war, there was abundant of extra US dollars in the system. The banks seized the opportunity to  give the mortgage loans to almost anybody who wanted one. As the mortgage loans became available to everyone, the housing price moved higher and higher even at the wake of a dotcom bubble. No problem…with the money, we can build more houses to meet the demand. The wars? We had all the defense industries that were happy to provide as long as they got paid. We also had the Chinese to provide all the clothing, furnitures, and toys for our soldiers' wives and kids.

They are happy , too, because we bought all those with money.

 

I think July 4, 2008 is the day when this money created prosperity hit the nag. On that day, oil hit a record high of US 145 per barrel.  Soon after that, the stock market started to break down, and the unprecedented economic tsunami started.

Yes, by flooding the world with money, every human resources can be put to produce. We can build  houses, bridges, airports, airplanes, casinos, …as many as we want. After all, there are still billions of people who want to work.

But there is one problem. The natural resources are limited. Of all the economic activities, most require the exploit of the resources of the earth. True, we still have many human resources on earth that are untapped. However, the sad fact is that, the available natural resources are just not enough to support the whole human population.

I think this is the fundamental problem, a problem that money can not solve.

 

at the juncture

Attached is the weekly chart of GLD, the ETF for gold. Gold has hit the $1000 mark, but it is also at the point where many chart readers see as the “top”. Will GLD brak away from this point of strong resistance and reach the new high? The second chart is the S&P 500 weekly. S&P500 has completed its reversed head and shoulder pattern, and according to the chart, it is UP for the long term. However, for the immediate future, the chart seems to indicate strongly that a correction back to 950 is imminent. So, for the stock traders, this is the tough time to call direction. Having said that, it is not so hard to trade. I think the market is right. US economy has passed the worst, so there is reason to buy stocks for the long term. On the other hand, the economy is still weak, therefore, there is no reason to celebrate. Since the Fed keep the interest so low, many investors continue to find the US corporations to be the better place for their dollars…while others feel Gold to be the even safer place. Something has to give. If I must bet, I would bet GLD to break out to the upside , and S&P 500 back down to 950.

Stock market trading

Since I first visualized a reversed head and shoulder, 2 months has passed. ( It takes patience…) Now that we revisit the chart, not only the reversed head and shoulder pattern has completed, the SP500 has broken up the neckline. The market is saying: the worst is over. For the longer term, it is safe to invest in the US equity market now. What will be the best timing to add more stock portfolio? My guess is a 7% pull back from the current price, or, S&P 500 at 930.

What if Richard Russell ( Dow Theory Letter) is right that, this is a bear market rally? No problem. If the market turns down to much lower, it is going to form a head and shoulder pattern with the neckline at the level around 920, meaning that you still get a chance to sell your stocks at the point of right shoulder, which is likely higher than 930.

So here is the trading strategy: waiting for the pull back to around 930. If the March low is indeed the worst, then you just sit long to share the profit of US economic recovery. If the stock market does not turn up at 930, instead, continues to break down below 930, then Richard Russell could be right that this is a bear market rally, and the March low would be retested.

Even then, do not need to be panic. The market would head down , but again with a head and shoulder pattern. Prepare to sell all your stocks at the right shoulder, which is likely to be better than 930.

Stock trading is like hiking a mountain trail in a foggy day. You only go as far as you can see, until you see the next sign post.

judgement call

Attached is the weekly chart of S&P 500. I am still waiting patiently for the right shoulder . If everything is precisely as predicted, the S&P 500 should return to 830 before the market can move upwards again. As of now, S&P stands at 916, therefore, the right shoulder represents a 10% discount from today’s price. Of course, there is always the risk that the prediction is off. Is it worth it? It is a judgement call…always the toughest part of trading.

state of the market

Is this a bear market rally ? Or, is the March low the bottom? This is the debate of the time. Personally, I believe the March low is the worst.

Having said that, I think all traders should keep an open mind. We do not trade by “forecast”, rather, we trade by the “sign”. If the market starts to move up from the market low as forecasted, then a reversed head and shoulder pattern can be expected. With that in mind, I would make my trades accordingly.

Now the left shoulder and the head have been in place, I am expecting a right shoulder to be formed next. On the other hand, if the market moves down further and even break the March low, then all bets are off .

Reversal Head and Shoulder?

First attached is the daily chart of S&P 500.  The index has moved up from the downward trend.  This is a very positive sign.

 

Also attached is the weekly chart. The weekly chart also shows the breakout from the downward trend. If the index pulled back from here down to 800, that would be the perfect point to get in . A reversal head and shoulder pattern is forming.

 

I think this is what most money managers are planning. As such, this has been the action of the market.

What to do about GLD holdings?

Some friends of mine are worried about their gold holdings. Understandably, Gold has retreated from the high of nearly $1000 to below $900. There are more bearish comments from the analysts recently. Furthermore, it is very hard to “estimate” the value of gold.

Gold holdings are not like IBM that generate earnings to support the price. Gold is not even like commodity that there is always the fundamental “need” to support the demand.

Gold is simply a yellow metal that is of little practical use.

Attached is the weekly chart of the gold ETF, GLD.

 

Here is my thoughts to share with those of you who are worried.

At this price, GOLD could go down to as low as $770. However, there is equal probability it could go up to $1000. I think the chance for each case is about even.

What is to be considered, though, is the longer term.

If GOLD should drop to $770, I think the big money would come in and life it up to $880 very quickly. 

On the other hand, if GOLD should move up to $1000 and up, chances are that it would never come back to $880 anymore. $1000 gold would be history , just like $35 gold is now a distant history.

I think the Risk/Reward favors holding GOLD at this price.

Is the worst behind us?

April 1 (Bloomberg) -- U.S. stocks advanced for a second day as sales of existing homes unexpectedly increased and a manufacturing gauge topped economists’ estimates, bolstering optimism that the worst of the recession is over.

So reflected on the stock market.

However, the pictures that stole the media attention from the G20 meeting are the riots of massive protesters. These people who demonstrated on the streets  to protest are citizens of the once wealthiest nation in the world.

 

The attached picture is a scene in London.  I must think again if the worst of this financial crisis is really behind us.

 

 

The trend beneath the current financial market crisis

March 18 (Bloomberg) -- The Federal Reserve opened a new front in its battle to bring down borrowing costs across the economy, pledging to buy as much as $300 billion of Treasuries and stepping up purchases of mortgage bonds.

 

Hmm…and there is the additional $600 billion that the Fed has already committed to buying of mortgage-backed securities and bonds sold by government-sponsored housing agencies. Through emergency loans and liquidity backstops, U.S. central bankers have expanded Fed credit to the economy by an unprecedented $1 trillion over the past year.

 

Ok…so what is this?

 

Basically, the US government wants to rescue this economy with a lot of US dollars. However, they can only borrow so much from the private sectors and foreign governments. After all, Chinese Premier Wen Jiabao already voiced concern and said that he is “worried” .

 

No problem. The Federal Reserve is now out on the front, and they are willing to lend as much money as needed to the US government. After all, the Federal reserve has “UNLIMITED” amount of money. That is the beauty of it! The world’s currency is US dollar, and we own the printing machine.

 

Of course, the Federal Reserve , basically the central bank of the world, must maintain its position as fair and neutral. So they do not just “give” the trillion dollars to US government, they simply “lend” the money, and they “expect” the money to be returned.

 

 

Now, how does US government plan to return that money to the central bank ( of the world )?  Obama said that he would tax the wealthy “AFTER” this crisis is over. So, at least, the US government is still maintaining its responsible principle.

 

In the mean time, though, Wen Jiabao is still worried.

 

That is the primary trend that is going under this financial turmoil now.

Will recovery come sooner than later?

Attached is the weekly chart of Freeport Mcmoran Copper. Copper gets a nickname as “Dr. Copper” because its price action best forecasts the trend of overall economic  activity. So, what does Dr.Copper say about the economy?  I think it says, the economy fell hard last October, and we are crawling out of it.

 

 

Many sectors fell to new lows since last October, but FCX has moved up some impressive 50% since then. This could be an important divergence . The market continues to make new lows, but Dr.Copper is telling something in the opposite direction.

 

Majority of economists and CEO’s are talking about a recovery in 2010 or later. However, Dr.Copper seems to indicate that the recovery could come sooner.

 

The Bull Market in Gold

    WASHINGTON, Feb. 23 (Xinhua) -- U.S. President Barack Obama vowed on Monday that he will cut his country's budget deficit by 2013.

    "Today, I am pledging to cut the deficit we inherited by half by the end of my first term in office," Obama declared, as he opened a "Fiscal Responsibility Summit" at the White House.

Apparently, Obama administration knows how important it is for US to keep its dollar as the reserve currency of the world and they mean to keep it that way. Indeed, I start to think that, US might just sacrifice its growth to save the status of reserve currency for the dollar. After all, it comes so handy and so secure to own the printing machine of the world’s money.

 

That news weighed on Gold.   

 

Attached is the weekly chart of GLD. 

 

 

 

 The strong upward rally of GLD was abruptly checked and reversed. Now GLD is heading down.  From the surface, this looks like a regular short term correction with a hard support at the level of $88. However, deep in MJ’s mind, there is this doublet: Is the 10 year old bull market in GOLD finally over?

 

I think NOT.

 

Obama’s plan is to cut the deficit by raising tax , not by cutting spending.

In other words, the economy will stay at the expanded stage.

 

How about the billions of  dollars on the “balance” of the federal reserve? Those might stay there forever. In other words, the printed money would move around in the world. Those would never be returned. Why? It is easier that way.

 

In short, it is much less resistance to inflate out of debt.

My conclusion: The bull market in GOLD is still well and alive.

 

Have we seen the stock market bottom yet?

After walking in the rain for 2 hours, you feel a bit of sore throat. You take a hot bath, drink a lot of fluid, and take double dose of vitamin C. After one good night of sleep, you would likely feel total healthy again.

However, if the sore throat is getting really bad, and you feel body ache all over the place , chances are that, the virus inside you has accumulated to a critical mass that no medicine can ever suppress it from a whole brown bad cold.

The only way for your body to recover is to wait it over. The only advice from the doctor is for you to rest. You must endure more weakness, more pain, some fever, …until finally, the  virus attack runs its full complete cycle.

 

 

I think that is what we have on this deep recession. It looks more and more likely that the stimulus plan is only to keep the pain more tolerable. We still must let this down turn run its complete cycle.

 

As for the equity, I am afraid that we have not seen the bottom until the day of capitulation…when all the investors throw in their towels.

Is the gold rally a bubble?

My friend David sent me a news letter  that he deems “respectable” with a good track record. The news letter says that, the Gold rally is a bubble. He urges his readers to sell Gold.

In the news letter, he sites 3 reasons that Gold is a sell at this price.

(1)   We are in a period of deflation, not inflation.

(2)   The US government does not “print money”, they just “borrow” money.

(3)   The world has as much gold as the people wants, needs, or uses. The supply far far exceeds the demand.

Let’s keep an open mind and review his points:

(1)   We are in a period of deflation, not inflation.

True, we are in a period of deflation, not inflation. During the period of deflation, all prices should come down, not up. For the “commodity” part of Gold, the value  should also come down as well.

 However, a big part of Gold’s value is the “currency” part. Gold is a form of currency, just like US dollar or Japanese yen. Actually, Gold is the most fundamental form of currency. Just as recent as 30+ years ago, government was allowed to issue its paper currency  based on the amount of Gold reserve. Basically, gold is the real money. US dollar is just an “ I owe you this much gold” note.

As such, in a period of deflation, values of money increases. So is Gold, the real money.

(2)   The US government does not “print money”, they just “borrow” money.

If the government borrows the money and keeps it in the safe, then yes, no new money will be printed.   But , when the government spend it, and they will, that money will be printed. Say, government borrows 100 billion US dollars from China and spend it. The business that render the service or goods to the government would receive 100 billion dollar bills. In the mean time, China still has 100 billion dollar balance in the account.

       (3) The world has as much gold as the people wants, needs, or uses. The supply        

far exceeds the demand.

Does the supply of US dollar far far exceed the demand? Does the supply of Reminbi far far exceed the demand ? The answer is no. People want as much money as possible. The question really is: How is the Gold currency comparing with US dollar?  Which currency is more trustable ? Which currency is stronger?

At this juncture when the central banks of world keep printing money ( Yes, they do, in the form of Debt to the government ), which currency is more trustable?

US dollar? Or Gold?

The trillion dollar question...

Feb. 9 (Bloomberg) -- Treasury Secretary Timothy Geithneris seeking to draw investors into the U.S. financial-rescue program, aiming to add private funding as a new component of proposals to address the toxic debt clogging banks’ balance sheets.

So the brightest minds of the nation are working hard to halt this financial tsunami. In the mean time, many argue that, the hole is too big for the government’s stimulus plan to fill.

 

This is the trillion dollar question of the time. ( hmm..since when that we talked about trillion like it is nothing big? ) Is the stimulus plan going to work? If it is, then we might have seen the bottom of the US and global equity market. However, if the plan should fail, as many suspect that it will, then we are going to see another big leg down on the stock market.  

 

 

Of course, the nation and the world  would be in serious crisis. Maybe there would be wars. Maybe USA would turn socialism, just like Europe and Canada. Maybe the Dow would come down to 5000, and Gold would rally to 5000, when the ratio of DOW/Gold would be 1 again like it was in 1980.

 

All that is possible if the stimulus plan should fail.

Crisis and Opportunity

First chart is the S&P500 daily chart. The short term trend is up, but the index is right at the bottom of the trend. Is the S&P going to rebound as it is oversold? Or, is it going to break the trend line and start a new leg downward trend?  Market is at the blink.

 

Second chart is the S&P500 weekly chart. The intermediate term trend is up, but again, the index is at the bottom of the range. The market is telling the same thing: it is over sold, but we are very nervous.

 

Finally, the monthly chart. This is a long term picture of the S&P500. We are now sitting at the low of the post 911 bottom. The market is wondering: the bubble is burst, and all the values created since the post 911 low have been wiped out, but, is that all?  Or, the damage is so severe that, wiping out all the value simply is not enough, and there will be more damage to come?

 

This is the time of crisis as well as opportunity. The mission now for the stock traders is to preserve CAPITAL. However, preserving CAPITAL is only half of the task. The other half is to invest the CAPITAL in the right places when the bottom finally arrives.

In 1929 when the great depression started,  Kennedy's fortune was estimated to be $4 million. By 1935, his wealth had increased to $180 million. According to Time Magazine, Kennedy survived the crash “because he possessed a passion for facts, a complete lack of sentiment and a marvelous sense of timing.”

Keep your eyes on the ball

First chart is the daily chart of Toll Brothers, one of the nation’s largest home builders.

What you see is a stock that trades in range. It is moving up and down , waiting to see the next direction.

 

 

The second chart is the weekly chart of Toll Brothers. Now you see the real picture. The housing market is bad, very bad. If on any day the market moves up, it is based on “hope” that the worst is over.

 

The third chart is the monthly chart of Toll Brothers. Somehow this long term trend chart indicates some positive sign. It tells that,  if America continues to be the best place in the world, then we could assume that the worst is over.

 

Stock market is the leading indicator of the economy. Housing sector is the leading indicator of this market.  Is America still the best place in the world? President Obama certainly has brought in the first positive confirmation.

Support and Resistance of the stock market

All traders learn about some technical analysis.  In technical analysis, the most common knowledge is about “resistance” and “support”. There are patterns where most likely (70%) the stock would be subjected to heavy selling,  hence the upward moving stock price might encounter some “resistance”. There are also patterns where the stock is most likely ( 70% ) to be subjected to heavy buying ,  hence the downward stock price might find some “support”.

To be a winning trader, though, you must know better than that. Now most people know about resistance and support. Then, you must think, why would some people sell the stocks near the support? Or, on the other direction, how could there be any buyers near the resistance?

Why? Do they know something that you do not?

You must answer that question before you take advantage of the support /resistance statistics.

 

Attached is the monthly chart of S&P 500. Obviously, all eyes are watching closely the strong support at 800 level of S&P500.

 

US dollar in terms of GOLD

Attached is the weekly chat of US dollar in terms of GOLD, the real money.

 

 

 

After a wild panic buying due to the credit crunch, US dollar is still under the primary down trend in terms of real money, Gold.  Actually, the recent peak of US dollar index looks like a head and shoulder pattern to be formed.

 

We would watch carefully.