Breakdown Or Shakedown?

So the support/neckline at 1042 that every trader in the world is watching right now broke down today. As I wrote last week, the pattern projects a decline to roughly 865.

However, we are now approaching the 38.2% retracement of the rally that began a little over a year ago. Volume and MACD (green lines on the chart) are also failing to confirm the new lows currently being made.

This leads me to believe that there is a decent chance that this will prove to be a false breakdown (aka, shakedown). Patterns like these usually work best when they go relatively unnoticed or there is some skepticism about them.

Sentiment is pretty negative right now and there are just too many eyes on this chart for a contrarian like me to give it much credence.

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Eurozone To Investors: "Get A Hold Of Yourselves!"

"European governments intensified efforts to to settle anxieties about the health of their banking systems." Reading this headline in the WSJ this morning I immediately thought of this scene from the classic spoof "Airplane."

via youtube.com

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I Read the News Today, Oh Boy: The Perils of Austerity

• Ireland Is Evidence That Austerity Only Exacerbates Economic Decline - NY Times
• We are now in the early stages of another Great Depression - Krugman
• Bond market investors are sending a message loud and clear on the economy: They’re worried - WSJ
• A Case for Undervalued Equities: Earnings & Interest Rates - Trader's Narrative
• Investors who made billions on the housing bust are now snapping up barren plots of land in Las Vegas and Phoenix - WSJ
• Michael Jackson's Wacko Cash Machine Yields $250 Million a Year - Bloomberg

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Smug Renters Need to See This Chart

This is a very interesting chart from Paul Kasriel (via Barry Ritholtz) showing the relative cost of owning versus renting a home today. For the first time in a long time it costs significantly more to rent a home than to buy one.

The fact that mortgage rates are now at an all-time low is a key factor that makes owning look so attractive right now. On an absolute basis, however, home prices aren't as cheap as this chart suggests. Still, this may not be THE bottom but it is hard to argue that it is not a great time to buy.

via ritholtz.com

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The Chart That Every Trader On The Planet Is Watching Right Now

The S&P 500 so far this year has been working on a clear head and shoulders pattern, probably the most recognizable topping pattern in the world of technical analysis. 

Over the past month we've rallied up to 1131 and now back down to 1075 today forming the right shoulder of the pattern. The neckline sits below at about 1042.

The distance from the neckline to the top of the head is roughly 178 points. Subtracting that from the neckline leaves us with a projected decline to about 865. 

865 correlates pretty closely with the 61.8% retracement of the rally that began in the Spring of 2009, a popular fibonacci number used by technicians.

All of this fits pretty well into a clear blueprint for stocks to follow for the remainder of 2010. However, it seems to me that it may just be way too obvious.

I recognize and respect what the chart is saying but I just can't feel comfortable knowing that every trader and their mom is looking at the same thing right now. 

What may be more likely in the short term is another move to this year's highs that catches the bears leaning the wrong way. To quote one of my all-time favorite Dylan tunes:

 

Half of the people can be part right all of the time, 

Some of the people can be all right part of the time, 

But all of the people can't be all right all of the time. 

I think Abraham Lincoln said that.

 

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I Read the News Today, Oh Boy: 'If I Only Had Some Teeth.'

• Michael Lewis: "Goldman Sachs Is Doomed" - Business Insider
• Uh oh, iPhone 4 can't be HELD? - Boy Genius
• The Odds Are Increasing That Microsoft's Business Will Collapse - Business Insider
• 'Why I suck at golf and how that has everything to do with trading' - T3Live
• 'People from the internets, we have a failure of government taking place right in front of our eyes...' - The Fly
• Is the $20 Billion Fund Actually a Victory for BP? - NY Times
• It's Now Literally The Best Time Ever To Refinance Your Mortgage - Business Insider
• Oprah Winfrey Opts for Her Own Private Financial Adviser - NY Times
• It sounds like Al Gore got shut down looking for a 'happy ending' during a trip to Oregon in 2006 - NY Times

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I Read the News Today, Oh Boy: Dowja Vu?

• Will Dow 10000 turn out to be a long replay of Dow 1000? - WSJ
• San Diego May Use Bankruptcy to Roll Back Benefits - Bloomberg
• SoCal Home Sales at 4 Year High - Calculated Risk
• Southern California median home price surges 22.5% - LA Times
• Music Touring Bad; Album Sales Hit Record Lows - Big Picture
• Interest Rates Could Stay at Record Low Till 2012 - NY Times
• BP and the Vortex of Fear - FT Alphaville
• What it's like to own an Apple product - The Oatmeal

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Are Leading Indicators Showing a Double Dip Is Inevitable?

Great chart here from Doug Short depicting the ECRI's Index of Leading Indicators. Anyone for a double dip?

via dshort.com

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I Read the News Today, Oh Boy: Lowest of the Low

• BP: Still not as evil as Goldman Sachs - Felix
• BP Tries To Clean Up Coffee Spill - YouTube
• FBI to "arrest hundreds of people" next week for Mortgage Fraud - Calculated Risk
• Investors Getting Bullish on Treasurys Prices - WSJ
• The Cost of “Cool” at Quiksilver… - Footnoted
• Is Apple Technically Ripe For a Fall? - dshort
• The Debt-Deleveraging Continues - Pragmatic Capitalism
• Combining Two Competing Cancer Drugs, Study Finds Rare 100% Response Rate - Popular Science
• Mark Wahlberg Proves Tiger Wrong at Pebble Beach - WIBW

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Clarke and Dawe Ask the Million Dollar, Eurozone Questions

via abc.net.au

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What Do You Get For The VC Who's Got It All? The Wrap It Up Box!

Venture capitalists spend a great deal of their time listening to entrepreneurs and inventors pitch ideas for a revolutionary new product or business model. If I were a VC, the "wrap it up box" would be an invaluable tool in my daily routine. I would have one of these things right on the end of my desk with my finger resting on the red button.

via neatorama.com

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George Soros: 'The Financial Crisis Is Far From Over'

Hedge fund titan, George Soros, weighs in on the European sovereign debt crisis, the continuing financial crisis here in the U.S. and the prospect of a double-dip recession:

via bloomberg.com

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I Read the News Today, Oh Boy: The Truth About BP

• Whitney Tilson Explains Why BP Is Just Too Cheap Not To Invest In - Business Insider
• BP Expresses Extreme Confidence About Latest Leak Fix, Says Flow Will Slow To A "Trickle" - Business Insider
• 'It makes no sense for Obama to talk down the share price of BP, BEFORE they have paid damages' - The Fly
• Mortgage Purchase Applications decline 35% over last four weeks - Calculated Risk
• It looks like Pimco is listening to Richard Koo - Bloomberg
• Stewart Cink Gets a Little Crazy on the Course - Zach Johnson

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Are You Panicking Or Welcoming The Sell-Off?

I posted these two juxtaposed stories yesterday:

"Confidence In Stocks Is Sinking to Record Lows in the Options Market"

"A Vote of Confidence: Insiders Are Clearly Bullish"

Visually, it's easy to see that equity option investors are feeling panicky as stocks have sold off over the past few weeks:

This is the equity-only put to call ratio. Put buyers are dominating trading in the options market lately even as the VIX trades near a 1-year high (meaning options are expensive). In other words, traders are scrambling to buy downside protection regardless of the cost.

On the other hand, company insiders are taking advantage of the sell-off to add to their personal stakes:

This chart shows the Insiders' sell-to-buy ratio year-to-date. Insiders are buying nearly as many shares as they are selling currently. Typically sellers outnumber buyers by a significant margin (much of their compensation is in stock so selling is simply the way they monetize that compensation). So it is fairly rare to see this degree of buying by insiders.

Put another way, the smart money (perhaps the smartest) is buying right now as the dumb money is scrambling to sell (or purchase the right to sell). Which side would you rather trade with?

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I Read the News Today, Oh Boy: Turning Japanese?

• This Market Is Looking More Nikkei-Like Every Day - Business Insider
• Confidence in stocks is sinking to record lows in the options market - Bloomberg
• A vote of confidence: Insiders are clearly bullish - Marketwatch
• Starbucks CEO: "We spend more on health care than coffee" - CNN Money
• All of a Sudden, New iPhones Aren't That Cool - The Big Money
• HTC Gives Apple a Run for Its Money http://bit.ly/bqVEyC
• Buy this book immediately - Lefsetz
• Scotch Distilleries Are Thriving - WSJ
• Coach John Wooden's best coaching tip: Listen - Fortune
• ZOMG - This drummer is pure A W E S O M E - YouTube

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Scott Adams: "When Did Evil Become So Awesome?"

Over the weekend Scott Adams, Dilbert creator, penned a fantastic piece over on wsj.com. Like all good satire it certainly rings true:

I have a theory that you should invest in the companies that you hate the most. The usual reason for hating a company is that the company is so powerful it can make you balance your wallet on your nose while you beg for their product... Can you justify owning stock in companies that are treating the Earth like a prison pillow with a crayon face? Of course you can, but it takes some mental gymnastics. I'm here to help.

Read the whole thing here. (If you don't have a wsj.com subscription try this link).

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"The Felder Report" - June 2010

The June Issue of "The Felder report" is now available at TheFelderReport.com

Topics Include:

• Wall Street Clients Get "Fucked" By "Shitty" Deals (In Other News, Dog Bites Man)
• The major problem with "austerity" programs: they raise the risk of a deflationary vicious cycle.
• Will 2011 finally mark the end of the bear market that began over a decade ago?

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I Read the News Today, Oh Boy: Scariest Jobs Chart Ever

• The Scariest Jobs Chart Ever Just Got Even Scarier - Business Insider via Calculated Risk
• Government workers are America's fastest-growing millionaires - Forbes
• Willkommen im Hotel Kalifornia - Financial Times
• Still Don't Think The Flash Crash Low Was Real? Think Again - Business Insider
• BP Says Cap May Collect More Than 90% of Oil Leak - Bloomberg
• Majority of Consumers Not Interested in Purchasing Tablets - Mashable

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Private Sector Job Growth Is Nonexistent

Great chart here from my friend, Tim, over at "The Mess That Greenspan Made." Outside of government hiring there simply is no job growth during this so-called recovery:

via timiacono.com

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I Read the News Today, Oh Boy: Rub-A-Dub-Dub...

• Natural Gas ETF surges above April high - StockCharts
• Buffett Expects ‘Terrible Problem’ for Municipal Debt - Bloomberg
• Insiders Continue Buying the Dip - Pragmatic Capitalism
• Manure could power data centers, Hewlett-Packard scientists say - LA Times
• Wells Fargo Party House In Malibu Still For Sale - Business Insider

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The Muni Bond Time Bomb

Warren Buffett sounded the alarm bell on the internet bubble, the real estate bubble and the rapid growth of derivatives that contributed to the severity of the financial crisis of 2008. Yesterday, he added the municipal bond market to that notorious list. The LA Times reports:

...at the end of his testimony, Buffett was asked by FCIC Chairman Phil Angelides (who was treasurer of California from 1999 to 2007) what other bombs may lurk behind the credit grades the ratings companies dish out.

Angelides: “In the same way you said there were risks from derivatives, do you see extant risks, current risk, from the model essentially being unchanged from where it was when the mistakes, the [mortgage] disaster ... happened?”

Buffett: “Well, the huge question ... if I were running a rating agency now, how would I rate states and major municipalities? I mean, if the federal government will step in to help them, they're triple-A. If the federal government won't step in to help them, who knows what they are? If you are looking now at something where you could look back later on and say, these ratings were crazy, that would be the area.

“I don't think Moody’s or Standard & Poor’s or I can come up with anything terribly insightful about the question of state and municipal finance five or 10 years from now except for the fact there will be a terrible problem and then the question becomes will the federal government [help]?”

I imagine that the Feds will be forced to step in to bailout local governments just as they did for the banking system a little over a year ago. I just have a hard time imagining President Obama justifying leaving the states out to dry after giving Wall Street so many billions. BUT... I'm not willing to bet on that outcome. Munis are basically a crap shoot right now and investors aren't being paid nearly enough to compensate for the increasing risk of default.

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I Read the News Today, Oh Boy: Ban Offshore Drilling?

• Debt Deleveraging Process Will Take Many Years - Comstock
• 'There is no woman or man alive who could fill Steve Jobs' turtleneck' - Daily Beast
• The Hemline Indicator Flashes Bearish - Big Picture
• Equity Analysts Are Still Too Bullish - Big Picture
• Woman Says Citibank Fired Her Because She Was Too Hot - Business Insider

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