A winter for sports fans... our report from the Olympics

In This Issue:

Equities after the trend break... what next?
Transport indicators still pointing down
Employment MIA...
Carry trade weakens further
Chinese stocks continue to struggle
Commodity overview
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A winter for sports fans... our report from the Olympics
Interesting links

To stay tuned to the latest chart and market updates, please check our website version of this newsletter at http://tradesystemguru.com/content/blogcategory/54/88/ 

Equities after the trend break... what's next?

Last month we discussed the January Barometer that says as goes January so goes the rest of the year for the S&P500. After an early burst, the S&P500 lost momentum and ended the first month of the year down 6.5% from its December close. Since 1950, a negative January has correctly forecasted a down year 100% of the time for the index according to The Stock Traders' Almanac 2010. As any trader worth his or her salt knows, one indicator does not a trading system make but this is not a positive omen for markets going forward.

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Figure 1 – Weekly chart of the S&P500 showing the peak in October 2007 and rally off the March 2009 low. A bearish wedge chart pattern that had been building since last March was followed by a break in trend in early January. Note that volume has continued to drop, especially lately which is also bearish. Chart by GenesisFt.com

And there are other technical reasons for concern. Since bottoming in March 2009, stock volume has steadily declined. A rally on falling volume is suspect as it demonstrates a lack of investor participation.

As we mentioned last month, the fundamentals behind this rally have been largely driven by unprecedented government stimulus programs. One positive in the market is that two-thirds of the government stimulus programs are set to kick in the first half of 2010 and that should have a positive impact on stocks. But continued weakness given this tremendous lift would be bearish as it will indicate that stocks are struggling despite the injection of trillions of dollars in government spending. If so, look out below when these programs eventually expire!

Transport indicators still point down

A useful measure of transport demand is the Baltic Dry Index that tracks shipping rates for dry goods transported by sea and since it is not traded on an exchange is less subject to speculation and manipulation. It is therefore a good measure of real demand for goods and commodities used in manufacturing a wide variety of products around the world, as well as an economic bellwether.

Although the BDI is well up from its lows in December 2008, it has struggled since its last peak in mid November. This is especially bearish at this time of the year since as the yellow rectangles in the next chart showing the first six months of the year indicate, it has historically been a time of increasing transport demand.

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Figure 2 – Daily Baltic Dry Index showing typically strong performance in the first six months of the calendar year but as we see, this has not been the case so far this year which is another concern.

Railcar traffic published by the Association of American Railroads (AAR) is another good economic indicator. Like the BDI, the first six months of year have traditionally seen strong demand. As the next chart shows, rail traffic has remained weak and still hovers around levels not seen since 1988.

Traffic this January was even lower than it was in January 2009. 

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Figure 3 – Comparison of annual U.S. railcar traffic from 2006 to January 2010. No matter how bad the year, traffic tended to be strong in the first two quarters of the year then dropped toward year-end. The big difference is how much traffic has dropped in the last twelve months.

Employment still MIA...

As we have discussed in the past, this recession has been very different than every recession since World War II in terms of jobs – they are still MIA (missing in action). In this next updated chart, we how just how bad job losses have been since the latest recession began. Jobs have yet to post any measurable improvement and the number of those unemployed for six months or more remain at historical extremes (making these numbers even more incredible considering that the unemployment stats have been continually altered over the last twenty-five years to make them look more positive than they really are).

Jobs have clearly not responded strongly to trillions in stimulus dollars being pumped into markets.  This will have an expanding impact on the economy, especially as unemployment benefits expire for those unable to find work. According to the National Employment Law Project (NELP) report released on Valentine's Day, five million workers will exhaust their unemployment benefits by June (see article below). In March alone, 1.2 million are projected to lose their benefits.

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Figure 4 – Comparison of jobs losses through recoveries from 1948 to present. Source: Calculated Risk Blog.

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Figure 5 – Another look at employment recoveries after recessions shows just how serious the situation has been on the longer-term unemployed this time around. Source: Calculated Risk Blog.

Check out the most recent economic charts from the Cleveland Fed at http://www.clevelandfed.org/research/data/updates/index.cfm

Carry trade still points down

The carry trade has been a major driver of markets over the last couple of years. How are the carry trades faring has important implications. This month we update our chart of the NZD-JPY (New Zealand dollar – Japanese yen) which has shown a very high correlation with the S&P500 in the past two years. This currency pair peaked well ahead of the SPX in 2007 and bottomed five weeks before stocks in early 2009.

As the chart shows, the NZD-JPY continues to weaken and is now down 10% from its late October 2009 peak versus a drop of 6% for the SPX from its peak 10 weeks later. The 50-week correlation between the two remains high at .9149.  This is another bearish omen for stocks.

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Figure 6 – Weekly chart of the New Zealand dollar-USD (top), the S&P500 Index (middle) and the 50-week correlation between the two (bottom). Chart by GenesisFt.com

Chinese stocks continue to struggle...

Last month, U.S. and other national indexes were rallying while Chinese markets struggled. Now all markets are weakening together as our updated weekly chart of the four major international markets shows.

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Figure 7 – Weekly chart of the four major global indexes we've been tracking, the Shanghai Composite (SSE) in red, the S&P500 (SPX) in blue, the Indian Nifty Index (NFTY) in green and German DAX (GX) in magenta. The SSE and SPX peaked within a week of each other in October 2007 with the SSE leading the SPX, NFTY and GX lower from January through October 2008. Then the SSE bottomed well ahead of the other indexes but has been weak since mid-2009. Chart courtesy of www.GenesisFT.com

Commodity overview

For stocks, it is looking more and more like it will be a challenging year, but what about commodities? 

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Figure 8 – Weekly chart of the CRB Index showing the 2008 meltdown, 2009 rally and early 2010 correction with recent recovery. Chart courtesy of www.GenesisFT.com

As the next chart (above) shows, after rising 231% from their 2001 lows, the basket of commodities represented by the CRB (Commodity Research Bureau) Index retraced nearly 50% from the lows in 2008. Gold, a good leading commodity indicator, also weakened but appears to have stabilized, hovering around $1100/oz. However, it is important to point out that the period of February thru May is generally strong for the yellow metal.

Given the areas of weakness in the economy, the fact that commodities have remained relatively strong is positive (as long as it continues). Commodities exhibiting strong performance include cocoa which remains near an all-time high and cotton which has been rallying for the better part of 2010. Copper, a good economic indicator, rallied through most of 2009 then broke down in early 2010 but has come back somewhat to close above $300 on very high volume. However, much of the current demand comes from China. 

Daily updates

If you're interested in more timely updates and articles, you can follow me on at http://www.twitter.com/matt__blackman (double underscore between first and last name). You don't have to join twitter, simply click on that link to see what I'm tracking.

If you have a question or comment, please email it to me at the following address:

Investorinsightsmb [at] gmail.com (Please remove the spaces and substitute the @ symbol for [at] )

A winter for sports fans...

Like most winter sports fans, I'm enjoying the Olympics and have been able to take in a couple of events at Whistler. One of the advantages of living close to the mountain, we get to experience the Olympics from the epicenter.

So far we have taken in the first heat of the luge runs on the fastest course in North America (and possibly the world). We are set to watch the bobsled races on the same course this Saturday. What a treat!

Here is a photo I took of Swiss luger Daniel Pfister (quite a challenge given he was travelling at over 80mph) who came sixth in the event that was won by Germany's Felix Foch...America's Tony Benshoof came in a very respectable seventh which was the U.S. team's best ever finish. Well done Tony and team! For more on the event, check out http://www.vancouver2010.com/olympic-luge/

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                                            Photo by Matt Blackman

Interesting Stories:

Nearly 5 Million Jobless Will Lose Benefits by June

http://nelp.3cdn.net/474d812d8257a01773_rim6bn8q7.pdf

US debt will keep growing...

http://www.google.com/hostednews/ap/article/ALeqM5g1sLEQzfqWeHjqp-dZpdUCRKzL3AD9DS15600

The Impossible Math of Debt-Backed Money

http://economicedge.blogspot.com/2010/02/impossible-math-of-debt-backed-money.html

Greece: Our Debt, Your Problem

http://paul.kedrosky.com/archives/2010/02/greece_our_debt.html

Wall St Helped Mask Debt Fueling European Crisis

http://www.nytimes.com/2010/02/14/business/global/14debt.html?hp

Canadian housing market continues to defy gravity

http://online.wsj.com/article/SB10001424052748703808904575025100730017666.html

Treasury to sell another $2.43 trillion in notes in 2010

http://www.bloomberg.com/apps/news?pid=20601109&sid=a0vf2Ix0StIY&pos=11

Economic Cheat Sheet: Using Retail Sales to Forecast GDP & NFP

http://www.ritholtz.com/blog/2010/02/economic-cheat-sheet-using-retail-sales-to-forecast-gdp-nfp/


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Posted 02-18-2010 10:00 AM by Matt Blackman