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.

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.

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.

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.

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).

Let’s assume Greece and its private creditors reach a “deal”. That deal is far from the final hurdle to preventing a Greek default. According to the Wall Street Journal:

A deal could pave the way for a second bailout package for Greece. However, there have been fresh warnings from euro-zone governments that Greece must improve the implementation of its austerity measures in order to get further assistance. Mr. Rehn has said the euro zone, the European Central Bank and International Monetary Fund may need to inject additional money for a second Greek bailout.

Once a Greek deal is done, an assessment of whether Greece’s debt is sustainable will follow. After that, its official creditors—other euro-zone countries and the IMF—will decide how much money is needed to fill Greece’s remaining financing needs.

The question then is how many of the €200 billion in Greek bonds will be tendered by private bondholders. If too many hold out, then the debt-sustainability sums won’t add up. Greece has said it could then move to force unwilling creditors to accept the bond exchange, transforming the deal from one that could be called voluntary to a coercive default.

Germany also appears to be adding one more significant hurdle according to the BBC:

A leaked plan from the German government proposes a eurozone “budget commissioner” to take control of Greece’s tax and spending, reports say. The Financial Times, which has a copy of the plan, calls it an “extraordinary extension” of EU control. Greek Education Minister Anna Diamantopoulou called the German plan “the product of a sick imagination”. The European Commission said the budget “must remain the full responsibility of the Greek government”. A German official told the Associated Press eurozone finance ministers were discussing the plan.

While it may not morph into anything further, the daily chart of the S&P 100 Index below is limping into the weekend. Numerous indicators show slowing momentum. A close below 595.89 would add to our concerns. The ETF symbol is OEF.

The leaders in Europe want you to believe that Greece “is a special case” and that no other country will be giving bondholders “haircuts”. The market is not buying it. The graph below, from Zero Hedge, shows five-year Portuguese bonds just hit a new crisis low. Think about that – after all the bailouts, backstops, money printing, unlimited three-year loans, and market intervention from central banks, Portuguese bonds are currently showing the highest probability of default during any other point in the crisis.

The graph above throws some cold water on the face of the “everything is under control in Europe” theory currently touted by Wall Street. The odds are very good the news media will be able to republish many articles recently written about Greece by simply finding “Greece” and replacing it with “Portugal” in their word processor of choice.

The situation was summed up well in the Telegraph (01/26/2012):

A report for the Kiel Institute for the World Economy said Portugal would have to run a primary budget surplus of over 11pc of GDP a year to prevent debt dynamics spiralling out of control, even in a benign scenario of 2pc annual growth. “Portugal’s debt is unsustainable. That is the only possible conclusion,” said David Bencek, the co-author, warning that no country can achieve a primary budget surplus above 5pc for long. “We won’t know what the trigger will be but once there is a decision on Greece people are going to start looking closely and realise that Portugal is the same position as Greece was a year ago.”

From Bloomberg:

“I can understand the strict attitude creditors are taking,” Andreas Plaesier, a Hamburg-based banking analyst at M.M. Warburg, said by phone. “Greece’s behavior could well lead you to believe that this isn’t the last step and that other writedowns could follow. There’s also the concern over whether other countries like Portugal will seek to have their debt load lightened.”