Good riddance!

September is about to move into the history books and barring a monster rally it will be a loser. This is a good thing for those of us who like cycles because the past two Septembers were winners - going against the grain of seasonal analysis.

September is the only month of the year - on average - that loses money over time. If it did not revert back to this tendency in 2011 - in other words violate it for three years in a row - we'd have to give it a serious re-think.

All cycles are merely tendencies but there is value in them. The same can be said of all analysese as there is never a guarantee that a head-and-shoulders breakdown will lead to a new declining trend. The odds say it will but the odds are never 100%.  Our job is to assess how good the odds are for any given trade and make the decision to buy, sell or hold.

We use ambiguity to take a discreet action - what a concept!

And what to the odds say now? Bear market. Just don't be blind to the facts should they change for the better.

Just a reminder

Just a reminder that the market is well below its 200-day exponential average. This is different than violating it by a small amount.

This is the Dow Transports Average. That move below the average (40-week = 200-day) is a game changer.

So, enjoy your ouzo rally.  The hangover will not be as much fun.

Bordering on politics

Warning - non market post. 

I try to avoid politics in this blog but I may be in violation with this post. It's just that something I saw on a financial news show last week was bugging me.

There is no doubt that the host of the show and all his side kicks are small government advocates and most likely will vote Republican down the line. The guest was as far to the left as I've ever seen. It was painfully obvious, uncomfortably obvious, that the host was ready to pop an aneurysm in his brain during the interview. You could see the froth forming in the corners of his mouth.

OK, the stage is set. The topic was how much is someone's fair share of taxes.

The guest said that people in this country got rich thanks to the government and the public. Of course, the host said they got rich by taking risks, getting educated and doing hard work.  I wondered, how much of the guest's arguments were true. After all, without roads, electric power, the Internet, police protection, courts, bridges, tunnels and food safety inspection none of the wealthy's businesses could exist.

She had a point. 

Then it hit me. The rich, the poor and everyone in between all benefit from roads, police, courts and food safety. Rich people do not use more shares of soldiers' efforts than poor people.

In fact, we could argue that poor people require more police and prison expense due to their higher rates of crime.  Before you flame me about that distasteful argument, rich people require more enforcement by the SEC and white collar crime units.  Let's move on.

Here is the real argument, in my view. Since everyone gets the opportunity of having roads and police - note I did not say uses them - then why are there rich people and poor people? The answer is what rich people do with the services offered. Do they drink beer or do they write that novel? Do they complain or do they hit the pavement looking for work? Do they do what they've always done or do they go to trade school?

Again, don't flame me. I am fully aware that the cycle of poverty is tough to break. Discrimination still finds its place everywhere. And it is still who you know that often makes the difference between moving up in the world or moving down.  I get it. Some people are dealt a crappy hand while others are born with a silver spoon.

Yet some privileged people head down while some poor people pull themselves up.The difference, as the host would argue, is the blood, sweat and tears they put into reaching their goals.

Yes, rich people got rich thanks to the bounty and taxpayer fueled services of this country. But for two people with equal backgrounds and limitations, one still manages to be a success while the other may not. The difference is their own efforts.

So how much should they pay in taxes? Oh, I am not going to go there. But for the argument that without the taxpayer they would not have gotten rich, I'll agree. But only if people like that financial show guest will agree that taxpayer bounty is there for all people, whether or not they use it, therefore rendering the argument moot.

Please be civil if you care to comment.

CRB index

Here is the newfangled CRB index.

I dunno. Does not look like blown up bubble to me. Trendline support. Horizontal support. Oversold weekly RSI.

Interviews

All,

Given the turmoil in the markets, your favorite radio/TV/web outlet is likely looking for some professional commentary. I'd appreciate any leads you can toss my way.

- mk

FedEx - bad stock, bad pun

Breakdown, go ahead, give it to me

I rarely read the online comments to my columns on Barrons and especially not on Marketwatch. Anyone with lotion and a sock can rip anyone's work to shreds without really backing it up with proof. If I need to be told I'm an idiot I'll just ask my teenagers.

But I did steal a peak at one where the argument against me was that I used copper and small caps as indicators for the market. "It's a tech economy" he or she wrote.

Did you notice the difference? I was using time tested inductors for the market while Pee Wee wrote about the economy. A tad different, yes?

In July, I wrote that the industrial sector broke down just before the broad market broke. Funny - we still don't make too much stuff here in the country yet this indicator was spot on.

And last week, I started writing about base metals, coal, machinery and other heavy cyclicals breaking down - ahead of yesterday's rout and today's apparent continuation.

The moral of the story about how this time is not different. What has driven markets for centuries is still driving them today - human nature. And human nature leaves giant footprints for us to follow.

And there will be giant footprints telling us when the carnage is over, too.

Lanthanoid Breakdown

Monday, I wrote in my column that the break in copper was not a good thing for stocks. Of course, the edited headline was a more radical Copper Slump Points to Stock Sell-Off. But direct correlation aside, the evidence of a slowing economy is growing by the day.

Remember this hot stock of yesteryear? It is a rare earth minerals miner and it was thought to be critical to the future economy. China was hoarding rare earth minerals at the time, too.

So is it the Chinese slump that is responsible for this breakdown or is it something more sinister as lack of global demand? That is not my area but from the looks of this cyclical, industrial, economically sensitive basic materials stock, I think it is safe to say a few economic burners are not firing.

Brent soars vs. West Texas

This chart has an interesting look:

What happened at the start of the year to change a stable relationship to this? As a chart watcher, I don't really have to know but at the same time I cannot be blind to it. Energy guru Phil Flynn said the money printer in Europe shored up demand for the local brand of energy. He added, "Weak production from the North Sea and conflicting reports on the return of Libyan crude seems to be adding to the Brent woes."

Higher demand and lower supply. Hmmm. Should have paid more attention in econ 101. 

From a technical point of view, will this spread start to revert to the old mean or is it on its way to a new mean? FWIW, Flynn thinks West Texas has seen its low for the year.

Offense/Defense index

Over the years I've used a chart that tries to measure how offensive or defensive the market feels. Colleague Boris Simonder introduced me tot eh concept and I've been using readily available ETFs to calculate my own version. The idea is that when tech and cyclicals are in the lead the market feels good. And when healthcare and staples are in the lead, the market does not feel so good.

Here is the look over the past few years. Looks like a giant head-and-shoulders sitting on its neckline. At best, it is a break of the long-term trend t the downside.

Look back at the 2008-2009 bottom. This indicator set a higher low while the broad market set a lower low. A bullish divergence.

SpongeBob Market

Who lives in a pineapple under the sea?
Sponge Bob Square Pants!
Absorbent and yellow and porous is he.
Sponge Bob Square Pants!
If nautical nonsense be somethin' ya wish.
Sponge Bob Square Pants!
Then drop on the deck and flop like a fish.
Sponge Bob Square Pants!
- SBQP 1999

I hope to have a more thoughtful blog post later today but this morning is does seem that the stock market is flopping around like a fish after it was dropped on the deck of a boat.  In Quick Takes Pro this morning I wrote that it was like a heart in arrhythmia, beating wildly and not getting anything done.



click for a tune

1970s redux

This is a chart that ran last week in Quick Takes Pro.

Here is a chart of the Dow in the 1970s and start of the 1980s bull market. Using existing data and forecasts
based on the work of George Lindsay, the red lines represent cyclical bull and bear markets with very crude
targets for the rest of the decade. Note there is no collapse to Dow 400 as some might predict.

The similarities to the 1970s are remarkable. Interest rates may be different but the pattern of 18 years of bull
market (secular bull) and 18 years of bear market (secular bear) suggest that this is indeed a possibility for the
stock market now.

Does volume matter?

We have been bombarded by differing opinions on volume lately. Certainly, falling market volume did not stop the 2010 portion of the rally just ended.  Some say volume is no longer essential. Others say ETFs and off-exchange trading renders common stock volume on the exchanges useless.

Well, volume matters. It always matters. Perhaps we cannot figure out how the rally took place in 2010 on falling volume and maybe, just maybe, a rally that does not have sufficient volume support ends up leading the market to crash and burn city. After all, the masses did not buy and that implies they did not see reason to buy - or better yet, to chase it.

Volume is the stuff that tells us if price is lying to us.Yes, I know price rules but price can be pushed around a bit.

Some wisdom:

• In price there is knowledge (Ralpha Acampora and Alan Shaw argue over who said it first)
• In volume there is truth (Dennis Jarrett)

Wednesday's stock market volume was not anemic, it was comatose. Give the Dow rallied 275 points, that is not very healthy. Buy the rumor that the president will rock our world in his jobs speech tonight?  If so, there was no support for it in the market. Yes, price went up but few people put their money where their mouth is.

This is a bear market and indeed rallies are exciting.  But the trend is down and volume tells us that the August - September gains were corrective, not impulsive, to borrow a little Elliott Wave terminology.

Breakdown Without a Pause

OK, the subject was clever in my own head as a play on Rebel without a Cause.

One reason, as a bear, that I liked Tuesday's back-to-school session is that it did just that - gave us a lesson in trading. I am always skeptical of breakdowns that originate at the top of a pattern and then move unabated down to and through support. These sorts of moves are prone to failure and Tuesday's trap door open proves it at least for day traders.

But this is a bear market and we give bear moves the benefit of the doubt.  Look at the action an intraday chart and it looks like a bear flag.

Let the noodlers have their fun (that's Hillbilly Handfishin' for you redneck challenged). That the market gave us a head fake in the morning shakes out the weak bears and traps the delusional bulls. Stocks are cheap! they say.

Why yes they are. And they will get even cheaper.

Three Peaks

My colleague Ed Carlson, CMT, has a hot new book on the work of George Lindsay. Y'all might know is most famous finding - the three peaks and a domed house formation.

Usually, this stuff never works in real time.The markets change, new vehicles are introduced and they monkey around with trading rules to make cherished indicators - such as anything relying on tick data - like they are flinging poo at chartists.

This time, however, Lindsay, and Carlson albeit with a little journalistic license on my part, nailed it. The TP & a DH pattern nailed the summer top and even described what we all knew as the giant head-and-shoulders pattern that dominated the market all year until the July-August bonk.

I wrote this up for MarketWatch in June before the final peak here:
Market’s chart pattern shows trouble in the house

Next week, in their Trading Strategies section, I will have a follow-up. The sneak preview is that it remains bearish.