Stockscom Report for June 14/09
Market Synopsis.

Federal Reserve Chairman Ben Bernanke started an expression a few weeks ago with his reference to green shoots of economic revival being visible now. That phrase “green shoots” caught on immediately with the mass media and barely a day goes by now without some analyst commenting on the green shoots that are appearing around the corner. Ostensibly, there are so many green shoots, it seems that only the growing number of unemployed are blind to these things. In fact, last week’s number of first time claims for unemployment benefits dropped a not insignificant 24K to 601K, however continuing claims ramped up another 59K to 6.82 million.

Determining what the green shoots are and where their source is has become the ultimate challenge. Many analysts consider the Chinese stimulus to be providing the most bang for the yuan as its $585 billion has generated a 32.9% increase in fixed-asset investment for the first five months of the year. Nonetheless, the Chinese economy, forever perceived as an export-driven economy, has seen exports run right into a ditch. The latest data from May indicated that exports tanked 26.4% y-o-y but imports managed a small rebound on month-to-month data suggesting that domestic demand is increasing. Moreover, industrial production increased 8.9% in May proving for now that their stimulus is actually benefiting the country – something that cannot be said here in the US. The IP number adds support to the Chinese Purchasing Managers index of 53.1 for the same month with an index above 50 representing economic expansion.

On this side of the Pacific Ocean, the green shoots appear to be more distant and fuzzy. A decline in the rate of an increase in unemployment does not hold the same value as an increase in industrial production. Neither does a boost in consumer confidence translate directly into an increase in retail sales or a gain in personal income. Here, industrial production decreased 0.5% in April for comparison purposes.

Rounding out the top four largest economies are Japan and Germany. Japanese IP measured an increase of 5.9% in April while the latest data on German industrial output also for the month of April, saw a drop of 2.1% for the month. Despite the expansion in Japan, it is worthwhile to note that Japanese IP y-o-y is down 30.7% through April.

Technically Speaking

It has been an altogether very strange last two weeks with markets moving in tight lateral bands since the strong performance of June 1. For the record, three of the four major markets managed the slightest of gains over the past five sessions on steadily declining volumes. In general terms, the markets appear to be digesting the gain of June 1 however this has extended out to a rather unusually, lengthy period.

On the daily charts, there are some similarities, which we wish to draw the collective attention to. Stochastics have turned markedly lower and while still high, would seem to indicate that some backing and filling will continue to affect this market. One possibility is the notion that having succeeded in taking out the 200-day moving average (all markets), there is the need for some reality check and testing the support here is the key to accomplishing that task. Furthermore, in the case of the Dow Jones Industrials, resistance at the 9000 level (and the 2009 high) could be keeping a lid on further upward moves, however this theory has a weakness in that all three of the other markets have succeeded in surpassing their previous 2009 highs.

The weekly charts hint at higher downside pressures building with stochastics on the weekly charts rising to extreme overbought levels that will need to be resolved very soon. And on the broader markets, the drop in trading volumes as viewed on the weekly is nothing short of stunning. The tech sector, conversely, has not experienced such a sharp fall in volumes, thus remaining a stronger, bullish market.

Gold

The US dollar was firmer this week and gold suffered as a result. Notwithstanding all those kind words expressed by the Russian Finance Minister, Alexei Kudrin, claiming that there’s no substitute for a reserve currency like the US dollar, we consider this comment to be simply backtracking on the announcement made earlier in the week relating to Russia’s plan to purchase IMF bonds instead of US treasuries.

One interesting development is the steepening yield curve for Fed funds. In order to keep a lid on the increase in long term rates, Fed Chairman Ben Bernanke will likely feel compelled to purchase more long dated bonds preventing a sharp rise in long term interest rates which drives away potential homebuyers. Buying these bonds means another print run of fresh US dollars – an action sure to catch the ire of US dollar holders.

Gold fell during the week but has support at current levels and around $925. Perhaps more importantly, gold is now oversold on daily charts thus setting up for a rebound in price. All analysts are watching price versus the February high with most believing that gold will surpass this 2009 high and the significance of this level is magnified further by the long term development of a reverse head and shoulders formation. With its neckline at around the $1000 level, technicians extrapolate the reverse head and shoulders to reach a target of just over $1300.