Knees and Toes

Head and shoulders, knees and toes, knees and toes..........
-- children's song

Is every pundit calling the current market a head-and-shoulders pattern? I recall the same in 2009 and the market took off to the sky.  And even earlier this year, there was talk in the charting community of an inverse head-and-shoulders with the low (head) comprising of the Japan tsunami low.  That one did not work either.

Today's column was on said pattern as it spans the entire 2011 trading. In the Dow, no pattern. In the Nasdaq-100 a possible expanding triangle.

In the Russell 2000 a rounded top. Or, just a trading range.  Most of them have bearish implications but none of them have completed at this time.

But I stand by my view that the short-term is weak and the longer-term is also weak.  As I wrote in Barron's today, we just have to wait for the market to confirm the latter.

Here is the industrial ETF chart following the weak durable goods report.

The bears have the ball, that is for sure. But some positive news from Barnum and Bailey, er, Senate and House of Representatives could send an over sold and under loved market skyward. 

...and eyes and ears and mouth and nose. Head and shoulders, knees and toes, knees and toes.

Technical Analysis Quiz

Here is Hewlett-Packard.  Love the printers, love their e-commerce site where I buy ink. But the stock? Nasty, nasty, nasty.  Or is it?

What are the five technical features outlined on this chart? Winner gets a hearty "atta boy" or "atta girl" depending on your personal situation.

Thoughts on the US credit debacle

No, debacle is not too strong of a word. That Congress and the President let it get this close to the wire - again - is a disgrace. Yes, I believe there will be a deal but not because the bond market is not worried. After all, any deal or non-deal will not stop interest payments from being made. And Grandma should not worry either because, again, even without a deal there will be enough money to pay her SS check.

So, no, we will not default on contracts. We will, however, not have enough money to spend on all the programs that we may or may not need if no deal is struck. Did you notice the breakdown in the US Dollar Index today?  Better find a handbasket to ride.

The ratings agencies, for all their flaws and warts on the housing crisis, are telling us something. The USA has a greater than 50% chance of being downgraded anyway, even if the debt ceiling is raised and everybody sucking at the government teat gets their fill.

Wall Street is already preparing for the downgrade as it checks out its holdings. The hidden cost is everywhere because Treasuries are often used as collateral for financial dealings. What happens if the collateral is suddenly not such high quality? Will loans get called early? Will deals in progress get pulled?

And what happens to all sorts of lending rates that are tied to Treasury yields? Your mortgage might get a rate bump. 

And even worse, what happens to the value of short-term Treasury securities held in money market funds?  If you thought one fund company breaking the buck a few years ago was bad, this will be worse.

Again, I think there will be a deal and Armageddon will be avoided - or at least kicked down the road. But the problem remains where it always has been - with politicians and their only goal of getting reelected.

This is a bank?

Have you seen the TV spot where the dog starts "saying" to his owner and friend "We love our bank?"  Well, I am not going to buy flowers and candy but I am in the process of switching all my accounts (finally) away from the fee-monster Chase and to the local credit union (Bethpage Federal Credit Union on Long Island).

As part of the process, they needed to do some checking to give me overdraft protection on my checking account. It is essentially a loan and they go though the same vetting process. What is amazing is that within 24 hours of me sitting with the bank officer, they called me to verify the last piece of info and grant the "loan."

The same happened with the home equity department. I figured why not open the line of credit now before the economy seizes up again. Anyway, the nicest lady (judging by her voice and enthusiasm) called, also within 24 hours, to tell me I was approved. All that was needed was a few more documents to complete my file.

Let's recap - within 24 hours of sitting down at the bank, I had a personal saving, personal checking with overdraft, three custodian accounts for my kids, business savings, business checking and a home equity line of credit at a great rate. And they are all linked and available to me online.

Chase wanted twice the interest rate. Bank of America d*cked me around so long on documents that their original self imposed deadline for getting it done expired and I had to start over again - which I declined.

I will never look back and with any luck millions of fellow fee payers will wake up, too. Too big to fail? How about too big to serve?

Dow Theory

Today's column covered the transports' failure to hold on to a breakout to all-time highs. In Dow Theory, the idea is that companies that make the goods (industrials) and companies that move the goods to market (transports) should confirm each other. If both move to new highs then the market should be cooking on all burners.

If companies are selling lots of stuff and need to move them to market, that's good. The economy should be hot. We all know its not. The potential Dow Theory buy signal was doomed from the start so it really was a good thing it never fired. At a minimum, it saved a lot of market letter writers from egg facials.

I have contended for a long time that the two Dow averages - industrials and transports - are not what their namesakes tell us they are. McDonalds and Microsoft are industrials? Disney? Travelers? You get the point.

And even if you argue that the makeup of the Dow reflects the economy  then I will counter that Kansas City Southern does not move any products those stocks sell. Cisco is more of a transportation stock to me as it provides infrastructure to move data. So is Verizon. And Facebook.

The message is that the more things change, the more things change. Nothing stays the same and we all need to adapt. Sorry Chuck (H. Dow), that part of the theory is now fuzzy at best.

Organic Economic Observation

OK, I was not on the road yesterday, I was on the water taking a long overdue half a day off. Here is a little observation in the Peter Lynch tradition of walking around with your eyes open.

A friend who lives on the waterfront on the south shore of Long Island invited us down for some swimming and a ride on his boat. Considering it was 195 degrees with 200% humidity, the technical analyst in me admired the timing of the offer.

As we motored around the bay I noticed that we were practically alone out there. Yes, I realize it was Tuesday but it is July and there are a few million people living within 20 miles so the silence was eerie. My friend pointed towards the shore where million-dollar houses on quarter-acre plots paying 30K in real estate taxes crowded the horizon.

Normally, there would be a boat in nearly every slip. This summer, my guess is that there were boats in only a third of them. My friend told me that people are leaving their boats in storage. The fees to bring them out for the season and re-winterize them in the fall were adding to the current high price of fuel. We can speculate on the current employment state of their owners.

He added that people were also using their boats for more mundane purposes such as getting from one place to another - even if it is a restaurant on the water. Contrast this to using a boat to tool around the bay for hours just to see how big of a wake they could kick up.

And speaking of restaurants, none of the ones we visited using the boat were open. Again, it was a Tuesday but this is the high season.

High brow retailers such as Tiffany and Coach may be soaring. Low end fast food such as McDonald's may be soaring. Not so much for Winnebago and not so much for boating. You can decide where on the affluence spectrum the latter two lay.

Kompliance

I am not going to use the soup-related Seinfeld term or mention where it happened but brokerage kompliance has gone too far.  Today, I was asked to submit a topic for an upcoming webinar. Let me start by saying I have had great success with this particular webinar sponsor and the people with whom I have directly dealt are great. But the new rule passed on down from der kompliance department is ridiculous.

At first, I let it slide that they did not allow me to use ETFs as examples. I did not know why but that's the rule and they are the client, more or less.   Barron's, on the other hand, encourages me to use ETFs as that is what the audience likes and wants to read.

Now, they want to remove all names from the charts I will use. I can only guess that they want to be absolutely sure nobody takes the chart as investment advice. Perhaps that might be acceptable, if not palatable, if I used real time charts. But all charts will be at least a week old, if not four months old.

If the charts are not current, webinar attendees may not connect with them. But if they are not identifiable then I can make them up, data and all. Nobody would relate at all and my message about analysis would be lost.

Then I might have gotten a bit snotty with my contact asking if the terms "bull" and "bear" would offend "Animal-Americans."  But you get the idea. At some point, we should not have to tell someone not to spill hot coffee on themselves because it is hot. Or not to blow dry their hair while they sit in the bathtub. Or assume that someone in a teaching environment is telling them to buy a stock.  How brokers, sell side analysts and mutual fund managers cope is beyond me.

Bye Bye Bankie!

I heard the news today, oh boy! (Beatles) About how my nemesis JPMorgan-Chase-WaMu-Chemical-MannyHanny-BankOne-BearStearns was slapped with a few million in fines by the SEC and FINRA. I am doing my part by finally moving my last remaining accounts, including a fat loan that pays them many hundreds of dollar each month, to a Federal Credit Union.

Check out some of the terms offered by a credit union and compare to your commercial giant megabank.

Home Equity Line of Credit - 2.9% first year.  Prime plus zero thereafter with a 3.9% floor. Bank of America offered me 4.5% to start. My current JPM would not work with me at all.


Bounced check fee -$30 ($35 elsewhere)
Overdraft debit card purchase - under $20: zero, over $20: $10 ($35 elsewhere)
First set of personal checks - free
Ledger and business checks - free
Minimum Checking balance on interest bearish account - $5 ($500 or $1000 elsewhere)
Fee for interest bearish checking - zero

They offer everything the big bank offers, including online access to personal and business accounts all in one place for easy transfers. Their ATMs accept check deposits just like the big banks, too.

The only drawback is that the credit union does not have a branch on every corner, second only to Starbucks. But they have arrangements with hundreds of other credit unions so I can use their ATMs with no fee.

Buh bye, big bank. So glad we threw taxpayer money at a prehistoric business model.

The Boiling Frog

From Wikipedia (I love that site):

The boiling frog story is a widespread anecdote describing a frog slowly being boiled alive. The premise is that if a frog is placed in boiling water, it will jump out, but if it is placed in cold water that is slowly heated, it will not perceive the danger and will be cooked to death. The story is often used as a metaphor for the inability of people to react to significant changes that occur gradually. 

Let's not get hung up on facts as Wiki continues: According to contemporary biologists the premise of the story is not literally true.

But I certainly feel like I am sitting in some Farberware. It has been eight trading days since this rally began and the higher it goes the worse volume looks. I whined about this in Tuesday's blog. I whined about it in my column. And I whined about it in Quick Takes Pro.

What's the story Jerry? Is the market going up because the bears are down at the Jersey Shore and not adding any selling pressure into the mix?  Or that everyone who does not have to be at their desk is gone leaving trading to the whimsy of rookie traders who buy their odd lots on any decent news story?

Sounds right to me. But the bottom line is that the market is going up and I am losing money. Not too much, mind you, as I did have some long positions over the past few days. But the egg on my face is thick.

Is the water still heating up? Yes. 

Is it going to get hot enough to kill me? That remains to be seen.

Volume

All last year, when we all, your truly included, pined away about low volume, we never excused a pre-holiday session for its low volume. It did not matter if it was the day before Memorial Day or erev Christmas, low volume was factored into the technicals just as it is on any trading day.

So why are pundits dismissing last week's low volume as not so meaningful? 

What would Wyckoff say? That is an awful lot of price movement on very little money changing hands. Not exactly effort and result in balance.

As I wrote in today's Barron's Online column, "Put them (weak technicals) all together and mix with relief that there was positive movement in the Greek debt crisis. Garnish with the relative illiquidity of a preholiday market and you get a deceptively strong rally."