Short Takes

As we noted in Tuesday’s video, the S&P 500 did get another push higher this week. We closed right in line with the 1,343 number. DeMark aggressive sequential daily for S&P 500 moved to a 9-13 “exhaustion” count as of today’s close. SPY volume traded roughly 27% below a typical day, meaning the conviction behind today’s move was weak. Table still set for next week - we will see what Monday brings.

This morning’s bullish payroll report aligns with the “another push higher” and probable strength into next week scenarios. The area near 1,343 remains important on S&P 500, especially on a closing basis. We are open to making bullish or bearish adjustments, but we are still leaning toward the correction camp.

Something we continue to keep an eye on - from the Washington Post:

Defense Secretary Leon Panetta has a lot on his mind these days, from cutting the defense budget to managing the drawdown of U.S. forces in Afghanistan. But his biggest worry is the growing possibility that Israel will attack Iran over the next few months. Panetta believes there is a strong likelihood that Israel will strike Iran in April, May or June — before Iran enters what Israelis described as a “zone of immunity” to commence building a nuclear bomb. Very soon, the Israelis fear, the Iranians will have stored enough enriched uranium in deep underground facilities to make a weapon — and only the United States could then stop them militarily.

Monday’s S&P 500 high was 1,330. To get a bearish weekly 9 “perfected” setup next week, we need to see the market move above 1,333.47 at some point.

If and when Greece gets the next round of bailout money, it will still be on shaky ground. Excerpts from Bloomberg (2-3-12):

The rescue plan, which European officials and Greek creditors say may be wrapped up in coming days, includes a loss of more than 70 percent for bondholders in a voluntary exchange and loans likely to exceed the 130 billion euros ($171 billion) now on the table. That won’t stanch the bleeding, say economists including Holger Schmieding of Berenberg Bank in London. Greece will be saddled with too much debt, too little growth and too large a budget hole to do without even more money that euro nations led by Germany are increasingly reluctant to offer, they say.

“Greece is in deep trouble,” Schmieding said in a Jan. 30 report. “The current Greek adjustment program is failing. Excessive austerity, a lack of supply-side reforms, administrative incompetence and political deadlock have pushed the Greek economy into an apparent death spiral. More of the same will not work.”

An agreement could be reached “in the coming weeks, maybe days,” said Ackermann, also chairman of the Institute of International Finance. The group, based in Washington, has more than 450 financial firms as members and is representing private creditors in the talks.

“We can’t pay into a bottomless pit,” German Finance Minister Wolfgang Schaeuble said yesterday. “Greece needs a new program, there’s no question about that, but Greece must create the conditions for it.”

Greece will default on its debt and is likely to leave the euro, Nobel economics laureate Paul Krugman said yesterday at a conference in Moscow. “The Greek situation is essentially impossible,” Krugman said. “They will default on their debt. In fact they already have. The question is whether they will also leave the euro, which I think at this point is more likely than not.”

Fed Chairman Ben Bernanke speaks today and the closely watched monthly employment report comes on Friday before the open. Therefore, traders may be hesitant to make any significant moves early in today’s session. From the Associated Press:

US Federal Reserve Chairman Ben Bernanke will likely tell members of Congress on Thursday that the slowly improving economy may need more help from the Fed and that cutting the deficit too quickly could backfire. The hearing is sure to be contentious, and the toughest questions could come from Chairman Paul Ryan. At a hearing last year after Republicans won control of the House, Ryan told Bernanke that “many of us fear monetary policy is on a difficult track.” Monetary policy refers to the Fed’s use of interest rates to try to boost or slow the economy. At the time, Ryan also expressed concern that the Fed’s bond-buying programs could trigger inflation or fuel speculative buying of stocks or other assets. The Fed’s bond purchases were intended to further drive down long-term rates to encourage more borrowing and spending by consumers and businesses.

Based on DeMark counts, Germany (EWG) could see strength into next week, with possible short-term upside of 3%. The S&P 500 still faces a big bull/bear litmus test between 1,331 and 1,343. The weekly S&P DeMark chart is on track for a “sell setup” after the close on Friday, February 10. Recycled daily DeMark counts also align with the possibility of more upside into late next week. A non-recycled DeMark sequential count (using 22 days) also points to 1,343 being important on a closing basis.

Based on traditional technical analysis, the market is increasingly looking more like a bull market. Daily, weekly, and monthly DeMark counts tell us to be careful over the next few weeks. A close above 1,343 would add to the bullish evidence. Failure to close above 1,343 leaves a crack in the bearish door. Using the recycled daily DeMark count of the S&P 500 as a guide, the market could push higher at least until February 9. If gains hold up today, we may take a position on the long side of the market. Based on action above or below 1,343, we can make adjustments in either a bullish or bearish direction. We have been waiting for some resolution below 1,343; we may get in the next week to ten days. Monday’s video provides additional detail on the bull and bear cases. We still prefer Germany to the U.S. on a valuation and technical basis.

A golden cross occurs when a market’s 50-day moving average crosses above its 200-day moving average. We believe conditions have improved since central banks have cranked up the printing presses, which means the recent “golden cross” in the S&P 500 may turn out to be golden for investors. At the 15:08 mark of a January 17 video, we noted in 2008 emerging markets were “decoupling” from the economic problems in the United States, much as we are told the U.S. is decoupling from Europe today. While the emerging markets were acting as market leaders in ‘08, as the U.S. is today, the index experienced a golden cross (see below).

As you can see from the chart below, a golden cross can be followed by bearish outcomes as well. In fact, the emerging markets had already peaked when the golden cross occurred in May 2008. Therefore, it is important we keep an open mind about developments in Europe and the possible outcomes in the U.S. after the S&P 500’s recent golden cross.

Back home in the present day United States, we have high levels of bullish sentiment and an extended market. As we noted in the January 31 video below, the S&P 500 may make another charge higher. The outcome between current levels and 1,343 may set the tone for the next three to six weeks.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

We have heard for weeks “a deal is imminent” between Greece and its private creditors. Despite the brave face, the situation is far from fully resolved according to the Guardian (01/31/2012):

Greek officials launched a vociferous behind the scenes attack on European Union and International Monetary Fund negotiators as talks in Athens over the country’s mounting debts appeared to stall.

Before a deal can be finalized, the European Union (EU) and Greece must agree on the terms of the next bailout payment. In those negotiations, the EU is turning the austerity screws again with Germany applying the most force. Getting additional cuts passed in Greece is no walk in the park. From the Guardian:

Prime minister Lucas Papademos told aides that a crisis meeting of party leaders would be called as early as Thursday to thrash out a response to an increasingly intransigent negotiating team sent by Brussels, which is demanding severe austerity measures before sanctioning a further €130bn (£109bn) of bailout funds.

“The troika doesn’t appear to be willing to accept any concessions whatsoever on reducing the minimum wage and scrapping bonuses,” said the government aide. “No political party is willing to move either, saying wage cuts are a red line they are simply not going to cross. You tell me how this is going to be resolved. We have no idea and we’re very worried.”

While both CCM market models have jumped back into bull market territory, the Bull Market Sustainability Index (BMSI) is approaching levels that are typically associated with market corrections (see arrow right side).

Update as of 11:15 a.m. ET: Recycle counts can be based on 18 days or 22 days. Using 18 days, produces a recycle on the daily chart of the S&P 500, and the e-mini futures, but it does not recycle the S&P 500 pit futures. If you use 22 days, none of the counts have recycled, which tells us we have a mixed bag at the moment. As always, we need to keep an open mind in the short-run.

As described in the video below, the daily DeMark count on the S&P 500 “recycled” after the close on Friday, which has potentially bullish implications for the next two weeks. Other video topics include (a) key S&P 500 levels, (b) bullish case vs. bearish case, (c) ongoing expansion of central bank balance sheets (money printing), and (d) European stock valuations vs. those in the United States.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

We still have no resolution (bullish or bearish) relative to the S&P 500 below 1,343. The most recent push higher in the S&P 500 was relatively strong with daily RSI moving above 70. The 2011 chart below shows we may need a weak bounce/push higher sometime in the coming days if stocks are to move significantly lower. Notice the low levels of RSI (top) and MACD Histogram (blue bars) when the S&P 500 tried to recover from early weakness in a reversal pattern.

Portugal is Europe’s next big problem. According to the Globe and Mail:

Greece has been the debt crisis headline hog for months. This is unfair to Portugal, whose own financial nervous breakdown is getting uglier by the day, to the point that many economists and bond investors think a second bailout, a bond restructuring or outright exodus from the euro zone is inevitable. Most of Portugal’s key economic indicators are going in the wrong direction.

Things are not going well in Spain either. From the Globe and Mail:

Spain’s economy contracted by 0.3 per cent during the fourth quarter, according to official figures, edging the country closer to a new recession as it deals with huge levels of unemployment and painful austerity cuts. The economy is expected to slide further through March, placing Spain back in its second recession in less than three years.

As far as the U.S. markets go, not much has changed. We still have conditions in place for some type of reversal/top. An S&P 500 close below 1,314.65 would bolster the bearish case.

Potential areas of support to watch include 1,285, 1,275, 1,260, 1,213, and 1,192. A weak bounce between 1,298 and 1,303 would fit well into the reversal case (a move with weak RSI).