More on Intermarket

In today's Barron's Online column I talked about intermarket forces and how they can give us clues as to what is going to happen in the various markets. I just finished re-reading my copy of John Murphy's Intermarket Analysis and it is fascinating how all of these asset classes - stocks, bonds, commodities and the dollar - interact. Better yet, they can give us a read on the economy that far surpasses the predictions of the economist crowd.

What was that old joke? If you put all the economists of the world end to end they still would not reach a conclusion.

Intermarket analysis makes the economists' jobs so much easier and makes my own technical opinions that much stronger.

And for those who have been reading my work for a long time, you may have noticed great similarities in style to John Murphy. He does not know it but he has been my mentor since I started in this business in 1986. And he started Getting Technical (at Barron's Online before handing the keys to me. Ah, trivia.

Why are pizza and bagels still so expensive?

I have a question. Usually we are talking about how sticky gasoline prices are - you know, when oil prices go up so do gas prices and when oil goes down gas slowly eases lower.

But now I see something rotten in bakery-ville. Wheat prices have come down 40% - you read that right - since March yet the price of pizza, bagels and any other baked good you can name hasn't budged!

What's worse? Washing it down with milk that hasn't really come down in the supermarket but is down some 35% in the futures market since last summer (nonfat dry milk).

Everyone, including me, talks about food price inflation but that may be old news. The DBA ETF, which tracks corn, wheat, soy and sugar, has been trending lower all year. I'm not going to call for a bear market in food by any means, especially when the news is full of global shortages, but this is certainly some contrary evidence I have to feed into my market opinion machine.

So far, it just weakens my inflation and rising interest rate argument but does not reverse it.

Never Assume

Here is a excerpt from today's Quick Takes Pro:

Is it me or is it assumed that crude oil will hit 150 (I say this a lot)? Nothing else is assumed and analysts have stopped saying that the fundamentals support a price in the 80s. All we need now is for Newsweek or the Economist to run a cover story about a world with $200 oil and that would sucker in the last bull.

Yes, we were quite early in thinking it was time for a correction last week but the higher it goes the deeper the correction should be when it finally gets here. Fortunately, we have not been fighting the trend by shorting stocks or oil itself.

Don’t get me wrong; we still think that the oil bull market is far from over. It’s just that there comes a point where the risk outweighs the reward and for us that was in the area of 117. We know – too much left on the table but that’s what happens in a bubble. We will be ready to buy when the market makes its cleansing move and all of the sudden the pundits are back to “valuing” oil at 80.

Just for clarity, we do not think we’ll see less than 100 but there will be a trendline rising to about 110 by the summer that we like. 

Barron's Online clarification

Wednesday's column talked about the 50-200-day moving average crossover system but failed to clarify that exponential moving averages were used. Simple averages were whipsawed in 2004 and 2006.

For what it's worth, the crossover system remains in bear market mode.

Never forget that they are still stocks

Unless you were at the club all day playing golf you know that crude oil was up over three bucks today and that is on top of the 17 it was up during May alone. You would expect oil stocks to do quite well and indeed in the morning they were up.

But by the afternoon, when it became apparent that the stock selloff was going to stick the XOI index closed down a quarter percent Here's some more fun:

The USO oil ETF was up 3.8% (OMG that is huge)
The DUG ultrashort energy sector ETF - which was down huge in the morning - closed up 2.6%!

Zoiks! Talk about playing both sides of the fence!

Stocks tend to lead their related commodities - I'm just sayin'

Quant this!

Over the years, technical analysis has had its tools usurped by quantitative analysis and behavioral finance. But in an ever changing world, assumptions, especially those about tails and linearity, can kill the mechanical systems of the former. Hmmmm, sounds like portfolio insurance and Long germ Capital Management, doesn't it?

Here is an excerpt of an article found in the Financial News (US) and posted to a chat room by the world famous John Bollinger:

"Quantitative fund managers, who use computer models rather than human judgment to pick stocks, have continued to suffer since the credit crisis threw their calculations into confusion last summer.

They are fighting back with new models and new ideas, but are running into investor skepticism.

Three quarters of fund managers—quant and non-quant alike—agree the outlook for computer models is troubled.

It will be difficult for them to generate returns because they are all following similar market factors, according to a study last week from the CFA Institute (that's the fundamental analysis society to which all the Wall Street analysts belong), a trade body for fund managers.

Managers are responding in three ways, often in combination, the study found.

They are developing extra models, looking for fresh sources of information to feed into the models, and some are introducing a level of more traditional, human insight into their process."

End Quote

So, they are changing by adding more models? Garbage in, garbage out. At least they are adding a little human insight into the mix and guess what? that is technical analysis in an different dress.

Quants and all the propeller heads on Wall Street are a bigger herd than mom and pop retail investor.

Spank the Leaders

While Internet software is still OK as I wrote about in today's column, the real market leaders this month are getting taken out back and shot. How does a 5% haircut in Potash Corp sound? Same for DryShips? And my poor LDK Solar, recommended to customers just this morning, has backed off its huge gains (15%) to be up only 6%. Can you at least last until I can cash it in?

This morning it was "what me worry?" when it came to the economy but of course there was a headline saying that a gaggle of economists agree that a recession is either here or coming. I think the momentum players got clocked today as all the technical problems I've been writing about seem to matter now. Leadership was the only thing going for the market without any qualifiers.

The market may push all the evidence to the back burner and mess up as many of us as possible. It also may do it for longer than we can fight it, reminding me of my usual Barry Goldwater quote. "I'd rather be right than President."

I'd rather live to trade another day than be right while I fight the trend. But if it is turning I am going to be very ready.

The Lighter Side

Many have looked at similarities between 2000 and 2008 in terms of peaks. The following really has nothing to do with predicting tops or bottoms but I took it from an email I got in July 2000. I am sure the joke is even older than that but here's a bet - it will resurface this summer.

Enjoy. And no, it is not "tell your wife/husband" funny. A slight chuckle and a knowing smile at best.

A man in a hot air balloon realized he was lost. He reduced his altitude and spotted a man below. He descended a bit more and shouted, "Excuse me, but can you help me? I promised a friend I would meet him an hour ago, but I don't know where I am."

The man below replied. "You are in a hot air balloon hovering approx. 30 feet above the ground. You are between 40 and 41 degrees north latitude and between 59 and 6O degrees west longitude."

"You must be an Market Technician," said the balloonist

"I am," replied the man "How did you know?"

"Well," answered the balloonist, "everything you told me is technically correct, but I have no idea what to make of your information, and the fact is I'm still lost. Frankly, you've not been much help so far."

The man below responded," You must be a Fund Manager."

"Why, yes, I am," replied the balloonist, "but how did you know?"

"Well," said the man, "You don't know where you are or where you are going. You have risen to your current position due to a large quantity of hot air.

You made a promise which you have no idea how to keep, and you expect me to solve your problem. The fact is, you are in exactly the same position you were in before we met, but now, somehow, it's my fault!"

What Inflation?

According to the media, this morning's economic news tells us in no uncertain terms that there is no inflation. Check this out:

Main headline from a major financial site - Inflation stays caged in April

And now these sub-headlines:

• Consumer prices overall rise just 0.2% — half that when food and energy are excluded.
• Food prices see biggest increase in 18 years.
• Inflation likely to rise in 2009, mutual fund managers believe

Anyone confused? Better yet, anyone holding back on purchases of some items to pay for the increases in bagels, pizza, beer, rice, milk, gasoline and heating oil. Yes, these are the "volatile" food and energy components of inflation but they are now spilling over into the rest of life. People are not buying other stuff so price pressures go down yet who has more money left at the end of the month now than they did last year? Not me.

Inflation is here. The charts have been talking about it for a year and a half and all the government and economic wonks out there probably don't live in blue collar neighborhoods.

Gann Analysis

If you know what Gann Analysis is, then perhaps this might be funny. A quote from a chat room:

The Lakers-Jazz game squared out at a Fibonacci 55, 180 degrees in time, at the half.

Maybe not. Actually, Gann Analysis, while controversial, does turn up some interesting relationships. In that chat room, a trader with the handle AllenNev gave us that quote above but also pointed out that crude oil has hit a level that is very close to a Gann projection up from the 1998 low of 10.35. Don't ask me to explain the Gann Wheel. Let's just buy the fact that the target using that major low equals four trips around the wheel, whether you believe Gann has any validity or not.

Then someone asked about the Goldman target of $150 and lo and behold that is another stop on the wheel.

Again, please don't ask me to explain this stuff or even defend it. I cannot. Just accept that a lot of technical analysis is indeed gobbledygook to the untrained ear.

Ball of Confusion

Let's get right into the pop culture - name that 1970 band that recorded the title to this blog post.

Anyway, ball of confusion, that's what the world is today. Go ahead, check the day to day reports in the financial media and hum along. Stocks rallied despite rising oil. Record high prices set stocks back. Stocks stage comeback as oil hits yet another record.

While I may be paraphrasing, this is exactly the sequence of daily news reports we saw this week. Listen people, there is no correlation between oil and stocks. Yes, rising oil leads to inflation which kills the economy but if you are looking for a reason for what stocks do on any given day this ain't it. Journalists have to write something so they latch on to anything that any of their sources say that sounds good.

Confusion.

Hey, what happened to gold? Everyone was writing it off as the "bubble" burst on commodities but guess what?

And oil? The fundies say we are once again swimming in the stuff yet the price sets six new daily highs in four trading days. OK, I exaggerated but you get the point.

Interest rates? Wasn't a weakening Europe supposed to get them to cut rates over there? Not today, pal. They are worried about inflation, as they should be. Perhaps my call for a higher dollar later in the year was premature.

What's going on? (Dang, another 1970s pop song reference by.....you tell me). Don't let anyone tell you they know the full story. All I know is that the charts are telling me something is happening and that it is probably not a good idea to take out a loan to buy that big screen TV.

So Close, Bears

Maybe now that Barack has likely sealed the deal, so, too have the bears. Nah.

Actually, I wrote the text for today's column before noon today, as even with Barron's Online's lightening fast publishing turnaround it's still not real time. When I finished the piece the Dow was down about 70 - not much more than yet another wiggle in May.

When the editor got through with it and sent it off to production, the Dow was down 180 and sinking. I really hate it when the market starts to drop before I get a chance to tell everyone I am more bearish. Usually, it is thanks to the Fed but today it was just a heavy market sinking on oil.

But don't get too excited yet bears. The May market is still the same old head-fakey place it was yesterday. Oil is soaring today but I've seen reports that Gann analysis pegs now as a top. Can't argue that since I just don't know. But it does seem that oil is getting a little carried away.

So if the stock market is reversing here or if it has a few percent left in it, I think we remain in a bear market. I can't wait to see the AAII poll numbers this week to see if the ranks of the bulls are still increasing as they have been for weeks.

Does anybody care that 52-week lows are still beating new 52-week highs? Oh, the humanity!

The dollar and other markets

So much for the greenback bounce. This is still a good trade in my view but no market is letting us play very easily. Stock leaders crashed - for about two days before moving on to new highs. Same for oil. Can gold be far behind?

At least the bond market is behaving itself and continuing in its breakdown. And as I wrote in Barron's Online, so too are utilities wobbling.

We would expect commodities to go up on a day like this and indeed they did. Crude is a rocket but I bet my Elliott Wave friends might say it is in a 5 of 5 now so don't get in too deep. Let the Goldman predict 200 bucks. That seems a tad too high now (I was a 115 proponent back in February).

My message today is expect major fakes in markets that have not done so yet. Based on sector leadership and intermarket stuff, nothing is different now than it was last month - except that many markets could be in terminal waves. Enjoy them while they last.

Bloomberg/LA Times surveyed me

Although I don't know how they got my phone number here in NY, a guy from Bloomberg news in Los Angeles called me today with a battery of election and market questions. Normally, I don't deal with these tele-surveyers any more than I do telemarketers but I was in a feisty tell-all mode.

Who would you vote for with these two match-ups? or would you vote another candidate?

What is you most important issue? (I said all of them)

Are we in a recession and how bad is it if we are?

Is your personal economic situation better or worse and do you expect it to hange in a year?

Which sectors of the stock market are the best place to be for the next year?

In your opinion, how did we get into this credit crisis? Who is at fault? Do we need more regulation? Do we save the people in house trouble?

You get the point. But I stayed with this guy for the whole thing because it was crystallizing my own beliefs and views.

Changing gears, and it is related if you bear with me, I say comedian Nick DiPaolo last night at a local comedy club. After Howard Stern left K-Rock and its affiliates, he was one of the new set of unlikely talk jockeys brought in (I loved Penn Gillette's show) and although I don't agree with all of his stuff one thing stuck with me. He called the US a "nanny state" because the government thinks it knows better than we do how we should live our lives. He reiterated that if he does not want to wear a seatbelt while he is driving a car that is his business. He will not cause any damage to anyone but himself that way as he would if he were drinking.

Visualize. He said if he crashes though his windshield after hitting a tree he is not going to turn into a guided missile and land in nearby schoolyard. He'll make it halfway out and his face will land on the hood of the car. Lovely!

The point is that we cannot over-regulate behavior if it does not affect others. How much do we spend on enforcing all of these laws, too? If you want to do something stupid like not wear a seatbelt or smoke at home or jump off a the bow of the Queen Mary, go for it. Just be prepared to pay the consequences - a fine, jail, illness or death.

Let insurance companies charge more for these idiots and lower rates for the rest of us.

During the survey, I realized that our collective behavior, from the government on down, got us into the mess we are in today. How much money has been spent telling people what to do here and abroad? Now we have borrowed our way into the poorhouse.

Now it is time to tighten our belts and fix it.

If you find that the government is coming after the free market again, like a windfall tax on oil companies or taking the internet then run to your broker to sell stocks. The free market will work it out and if we don't tighten those belts on our own first, it will force us to do it.