Tucker Report

It’s been nearly a week since the teleprompter reading of the State of the Union. Stocks had been in a slide going into the reading, and continued through the end of the week, and of course have corrected back up part way so far this week. Certainly most presidents try to put a positive spin on their agenda and accomplishments, or lack of accomplishments in this case. But it was really astonishing how Obama could face the nation with such blatant lies. There was much slight of hand in making his arguments to the people. For example the spending freeze, which, by the way, will not start until next year, and oh, by the way it is only on a very small portion of the budget which was of course already increased by a substantial amount. Am I missing something or did Obama slam McCain during the campaign for proposing a spending freeze? And speaking of slamming, it was really extraordinary how Obama slammed the Supreme Court, sitting silently right in front of him, and made some obvious mis-statements, which Justice Alito now famously acknowledged, silently. It was a bit classier than Joe Wilson last year, but otherwise similar.

What was of course predictable was Obama blaming and whining about inheriting the economic mess from Bush. There is some truth to this, but much of the spending was done in the final two years under democrat majority, and that majority prevented attempts to regulate Fannie and Freddie. And that majority wanted even more spending than what was finally granted. Were any democrats that were in the majority for those two years calling for spending cuts and regulation of the lending industry? Few, if any. But Bush gets all the blame. He deserves some of the blame. But the very people blaming him, including Obama, are at least as complicit. I think Obama has played the blame game far too long. The American people are getting tired of it. He was supposed to take charge and fix everything. But now that the kool-aid has worn off we all see that he is floundering and doesn’t have a clue. And Beavis and Butthead sitting behind him at the State of the Union reading are even more clueless. It frightens me that these people are in charge of such a powerful and economically important country. Yes we are still powerful and economically important, but will be much less so if Obama has his way. The leadership in this country needs a real change that we can all believe in, not leadership that was based on a vague promise delivered to a hypnotized and intoxicated public.

Stocks over the past couple of weeks have finally put in a decent pullback. This pullback appears similar to the pullback last October, however that pullback didn’t really threaten the uptrend the way this one has. The previous pullback left the structure of the uptrend intact as it didn’t violate any of the previous significant lows, such as pivot or swing points. The current pullback has. Also, they way I view trends via the blue moving average lines, this pullback has turned those lines negative. The only other pullback since the start of the uptrend since March that turned the trend down was the pullback last June, which had two small impulses down.

The first two days of this week have rallied sharply back up near the declining moving averages. I would expect a test back down as the price approaches that darker blue moving average, if that should happen. The weekly trend still looks bullish in my opinion, so despite the recent downmove, I still view this as more of a correction in an uptrend rather than the start of a major trend reversal. At least for now. That view would change if the next down impulse exceeds the previous pivot and the downlegs increase in size and volume. It is quite possible that the entire upmove from the March lows is nothing more than a correction of the bear market from October 2007 through March 2009. The S&P is currently sitting near the 50% retracement area based on that entire bear market range, and is also within the fibonacci zone of that range, for those who believe in such things, which I do not, but those concepts make interesting chatter.

As a technical analyst it should be enough to just look at the charts in isolation and make an intelligent assessment of the market condition. But in reality I find a need to explain to myself why a market moves up or down based on what motivates buyers and sellers. Many times there is a disconnect between what prices do and what seems that they should logically do based on the fundamental, economic, and political backdrop. It seems we are in one of those times now where logic and reality are at odds. Perhaps the market sees change in the future. But the market doesn’t always do such a good job at predicting the future. Are earnings improving based on sales or just cost cutting and rebuilding depleted inventories? Can sales actually improve if employment figures stay bad? If earnings are not based on increasing sales can earnings continue to improve once inventories are replenished and no further cost cutting is feasible? Can the dollar keep falling and spending keep increasing? If interest rates start to increase how can we afford to service the debt? What will happen if the mid-term elections fail to change congress and the democrats can pass cap and trade, health care, and whatever else they might want to do? I don’t think the stock market is asking enough questions. There is much to fear out there. It’s not enough to just put piles of money into stocks because there is no place else to put it. But then again, the technical don’t care about any of this. Explanation is not necessary.

It was quite a holiday shortened week. On Tuesday the market rallied even further into overbought territory, lead by the healthcare sector, as it became increasingly evident that Brown would win the election. There were no exit polls to suggest the probabilities had increased throughout the day, and the tracking polls hadn’t changed. However, the most accurate measure was the steady increase in the price of his futures contract on Intrade. Polls can be influenced by the selection of the sample if the pollster has a right or left bias. But those who put real money on the line seem to be better than the polls, at least on election results.

Stocks began to sell off the morning after the election. As was expected NBC, especially the C and MS versions, were quick to point out that the market wasn’t too pleased with the election results. I don’t think any of their viewers were dumb enough to buy that, and their take on the market and election had very short legs. In reality the market was hit by news of China tightening credit, Greece credit problems, and prospects for another Bernanke term in doubt. But the quickest drop in the market occurred during the Obama telepromter reading when he announced bank regulations. Whether or not his proposals had any merit or if they have a chance of being implemented I don’t know. With my bias against Obama I would assume they will be bad for business and for the country and will discourage banks even further from lending, which will be bad for any possibility of a recovery. But that might just be my bias. And the political climate seems to be making a rapid shift. Hopefully this shift will put the kabbash on where Obama wants to take this country, which in my opinion will be bad for the stock market in the long run. I really don’t think Obama gets it yet. I was waiting for him to blame Bush for the huge defeat last Tuesday. He didn’t disappoint. Well, he didn’t mention Bush by name, but did say it was the same discontent from the previous eight years that enabled Brown win. Now wait a minute, he’s been president for one year, so that means people were only upset with Bush for seven years, and they have been upset with him for the whole year he’s been in office. If he keeps using that same phrase about the previous eight years he may want to consider dropping it or at least update his arithmetic. It is really getting tiring listening to someone complain about all the problems he inherited. Reagan and Bush both inherited bad situations, but they took charge without blaming anyone. If he weren’t so disconnected he might realize that blaming the past can only work for so long.

If I were more suspicious I might think the timing of his bank regulation comments were politically motivated. He took a big hit. What better way to get the public back on his side than to hit hard at Wall Street banks. He blamed them for the mess we are in, along with Bush of course. Doesn’t more blame belong with Fannie Mae than with banks? If he wants to blame the past doesn’t some blame go to the change in congress in 2006 and Chris Dodd and Barney Frank?

In previous posts I mentioned the possibility that the market rally was an inverse reaction to Obama’s declining polls numbers. The above chart is from the most recent Gallup poll. There are other polls that show an even steeper downtrend. I do believe the defeat last Tuesday will lend more support to this trend going forward. But the market has been quite overbought, with very little corrective action since the move began last March. It was like a bubble looking for a pin. There were actually four pins the last week. The daily chart shows the S&P taking out the entire gains for the year plus some. So the uptrend has been violated on a short term basis.

The chart way back at the top of this post shows the weekly S&P etf, along with the adaptive CCI in the sub-graph. I like to use this CCI to show trend strength when the CCI is beyond the 100 lines, which are the dashed cyan lines. This last week the CCI crossed back below the plus 100 line. You can see that the CCI also dipped briefly below the 100 line twice previously during the longer term uptrend. However, the trend stayed positive as defined by the blue moving average lines over the price bars. These pullbacks were good buying opportunities by looking at the longer term chart. The daily chart may have convinced a trader to turn bearish, but the weekly chart kept a better perspective and kept the trader on the correct side of the trend, at least in the longer term. Price is still in an uptrend on this chart, although momentum may be slowing a bit. If price can hold at or near the darker blue line then maybe another impulse higher can still be achieved after this much needed correction. If price breaks that line and those lines reverse position, then perhaps the much advertised double dip will be in the cards.

For now I’ll try not to get too bearish on the longer term, which is hard not to do when looking at the news. But maybe the news will be getting better. Tuesday might have been a good start. We’ll see.

The stock market started off the new year with a continuation of the overall uptrend that has been in place for the last several months. According to the Stock Trader’s Almanac the first five days of January are followed by full year gains with an accuracy of 86% and an average gain of over 13% over the past 36 years. But then they also say that in mid-term election years that accuracy rate is cut down to about the same as a coin flip. I don’t put much weight to any indicator that tries to predict the future. I would rather try to interpret what the market is trying to communicate during it’s process of trying to establish value. But these stats are interesting to watch, but they has as much relevance as the Super Bowl indicator or moon cycles.

It is interesting to see how volume has been generally declining on price advances. The last couple of weeks of the year usually do display contracting volume, but the first five trading days of the new year didn’t really cause much enthusiasm as viewed by volume. The above chart is of the S&P etf with its volume, but the other volume measures on all the indexes show about the same pattern. There was a bit of an uptick in volume today on a down market. It appears this market has been relentless on the upside for many months, and possible all the bullets have been used up for now.

There are times when price action and the political and fundamental backdrop are in sync, and there are times when the market just doesn’t seem to make sense. The current uptrend seems to me to be one of the times that doesn’t seem logical. It is a truism on Wall Street that markets discount the future. This makes sense. The market doesn’t care so much about the past. It is forward looking and tries to discount what it sees down the road. But does it really do such a good job at establishing logical value to events or conditions six or twelve months into the future?

First, it is important to view the market not as some sort of disconnected supreme being, but rather as a collection of real people, some not so smart, making many different trading decisions, with many different trading perspectives and goals and time frames. The market is very efficient at determining what is a fair price at any given moment. But that price is not always a fair assessment of value. In fact it is often way off the mark. Trends can start at the slightest hint of some bullish or bearish development, and those trends can take on a life of their own. Many large funds use trading models that look for these trends and will jump on board. Often these trends go far past any logical connection to the trigger that started them, and they often seem unstoppable as more and more traders pile on. I thought we were at that point in the gold market recently, and it appears the same condition might be happening in the stock market presently. One difference I see between gold and stocks is that the fundamentals in gold seem solid and long lasting. It was just sentiment and too much price movement too fast that turned me cautious. However, the stock market seems divorced from economic conditions.

So is the stock market seeing something down the road? In previous posts I presented one possible explanation. It seems that there is an inverse relationship of the stock market to the job approval of the current administration as well as congress. If the health care debate continues to lose public support, and if those politicians who vote for it will be voted out of office later this year, then the socialist policies of Obama will be much more difficult to inflict. But then again turning over control of either or both branches of congress to republicans may not help matters much. I would rather throw them all out and start over. But that won’t hapeen. But a change would at least render impotent the massive swing to the left, which left unchecked would be as difficult to undo as removing cancer. But then I do have a political bias against this administration and its policies which I realize influence my stock market views. So maybe the stock market isn’t really looking at the future direction of politics. Maybe it is really just dominated by those seeking trends and momentum. It might be that it is as simple as there being a pile of cash looking for a place to go in an environment with essentially zero short-term interest rates, and longer term rates not much better with much risk.

But the question remains as to whether the market is actually seeing conditions in the future that justify such a continued one-directional up market. Looking back at several previous price trends and their eventual demise, and then correlating those trends on a timeline with the fundamentals, I would say the markets have done quite a poor job of discounting the future. It is of course not sensible to expect the markets to be able to forecast a black swan event, but I would have thought the market would have been able to foresee the collapse of the real estate bubble and the inevitable credit problems to follow. The stock market seemed oblivious as trouble was brewing. There are numerous similar examples over the past several years. In studying many bubbles and busts in stocks as well as many commodity markets, it would seem that the perpetuation of a trend taking on a life of its own, is a more powerful force than impending changes in the fundamental, economic, and political backdrop. This seems to be the case more and more over that past 25 years or so. Maybe the more widespread use of technical analysis has enabled this phenomenon. It appears the markets are becoming more of a lagging indicator, and not really discounting anything.

I write this on the eve of Christmas eve, and also the eve of the historic and disastrous bought off senate vote on obamacare. The public does not what this awful bill to pass. Many of the democrats don’t even want it. But comrade Harry Reid is intent on getting something through the senate. On the bright side there will most likely be a backlash and hopefully a large turnover in the 2010 mid-term elections. I’d rather they throw all the bums out, in both parties, and just start over. I once tried to restore a somewhat rare Italian car that was a real mess. It seemed no matter how much money I threw at it and how much time I spent, there were just too many problems to sort out. The car was never correct. I finally dumped it and got another car that was much more sound, and the restoration was much more easily accomplished and much less costly. So I say throw them all out, both parties, in both the house and the senate, and start over. With nearly three hundred million people living in the United States it is truly amazing that we voted in 535 of the most inept to run our country. I still say we should have some kind of simple test to grant people a voting license. Something simple like not thinking the capitol of the US is Las Vegas, like one person answered on Jay Leno’s Jaywalking segment. I’m quite certain that person voted a straight democrat ticket. That would change with a simple test.

The stock market seems unconcerned about the health care bill, and if passed, the soon to follow and equally insidious cap-and-tax bill. The market seems to resist all attempts at a meaningful correction. But it does seem that the pattern of impulse higher and then pullback to the moving average, followed by another very symmetrical impulse higher has changed. The impulses seem to have dissipated and the market, at least the S&P 500, seems to be marking time by chopping around in a sideways trend, although with a somewhat bullish bias, as pullbacks so far are quickly bought up. The Nasdaq had been displaying similar characteristics, but has broken out to the upside over the last three sessions to make new recent highs. However, there are many divergences starting to develop. The financial index is trending lower. Oil and some commodity names that had been leading look like they are rolling over, but industrial metals are moving higher. And the dollar, which had been moving contrary to the S&P, is now moving higher to fill in the gap from last September. With the divergences and some loss of upward momentum in the S&P, it will be interesting to see if a correction can get started next month. It is overdue. Stocks may be priced ahead of the fundamental backdrop. We’ll see.

I had been warning of a blow-off in the gold market for some time. This market has come down substantially in recent sessions. The trend on the daily chart has turned down, however prices are now sitting on some minor support at the previous peaks of last October. Many chartists put some significance in these levels, so they can become self-fulfilling. These swing points often do create levels for prices to test. There have not been any other pivots or swing point to measure against during the last impulse higher. My fear during that last impulse was that the trend would go exponential, creating a final blow-off to the entire bull market. But the uptrend stopped short of that, and this pullback has been orderly and should be seen as a healthy event for further upside progress in the future. I don’t have a clue, nor does anyone else, if this support will hold. There are several more areas of possible support under this level by viewing the longer term charts. It would take a substantial move lower to put the longer term bull market in jeopardy, in my opinion. But it might be some time before the daily trend puts in another leg to new highs. Of course anything can happen with this reckless government and out of control spending. I think these market are factoring in the falling poll numbers and possibly looking ahead to the 2010 elections. If there is a big change in the makeup of congress it may help to at least create some sort of gridlock that could help block some of Obama’s extreme radical agenda. But congress will still be populated by mental midgets with no ethics or standards. I still say throw all the bums out.

This blog has been warning for some time of a meaningful pullback in the gold market. I’m not claiming to have called a top, or that a top has even been made. My worry was that this last impulse would turn into a vertical parabolic ascent that would be a final blow-offto this multi-year bull trend that has seen prices more than quadruple. My hope was that there would be a meaningful correction to cure some of the excess bullishness in this market.

I’ve pointed out how difficult it is to call a top when a market accelerates to the upside with the public driving the trend. I know the perma-bull gold blogs say the buying is being driven by central banks and buying in India, etc, etc. I’m quite confident that the smart money was accumulating quietly well before the uptrend started making the news, and they most likely have been selling to the public all the way up. That is almost always the case with this type of parabolic trend and the hype seen recently.

The chart above shows the daily chart of the gold etf since July of this year. I left the same red lines that were drawn on several GLD charts from past posts that formed a triangle that broke out to the upside on September 2nd. The blue line are an adaptive moving average that shows how well the pullbacks were contained during this uptrend. The indicator in the sub-graph is the adaptive CCI (see articles elsewhereon this blog). This adaptive CCI is what I use to monitor trendiness, as well as to verify divergences from other indicators. Also pullbacks to the zero line often help confirm pullbacks to moving averages. You can see a nice example of this marked on the chart near the end of October. Also worth pointing out is that prior to the breakout of the triangle, the adaptive CCI gave an advance warning of the possible direction of the breakout by forming an inverse head-and-shoulders formation, indicated near the left side of the chart. More recently, I’ve been pointing out divergences between the gold price and gold mining issue, silver, volume, andmany momentum indicators. You can see how the CCI gave a series of divergences as price moved higher. When the CCI stays over the +100 line, as it did for all of the last leg of this impulse up, the trend is usually intact. A crossing back down through the +100 indicates an end to that impulse. In this case the crossing back down through the +100 came on December 4th, the day that gold was down over $60. It was not a timely signal, however the divergences leading up to the drop gave good warning signals. Of course there were many other warning signals along the way. Technical analysis has a difficult time accurately timing emotional markets when they reach extremes. It’s usually a matter of weighing and interpreting the clues.

The big question at this point is if the bull market is over or if this is just a meaningful correction. So far gold hasn’t really entered the type of blow-off that appears to be the final expression of an entire bull market, at least not in my opinion. If this correction can be orderly and doesn’t retrace the entire leg up from the triangle break-out, it would seem the excesses will then be worked out. Then a new accumulation phase can begin, which will most likely be followed by another huge leg up. At least this is what I am looking for, but as always, the market can do whatever it wants to do. Much of the driving force will still be dictated by the dollar and the inexperience and incompetence of this government, which will probably be supportive to the gold bull over the foreseeable future. I still think that the gold market is ignoring the deflation competent. It seems to be betting on the debasing of the US Dollar and the ultimate and inevitable resurgence of inflation. But if the economy worsens, especially if the employment numbers get much worse, there could be more deflation in the interim.