Morning Notes:
Trend Reversals Imminent?
Chip Hanlon, Michael Pento
and Bruce Zaro
Delta Global Advisors
Jun 13, 2006
From Bruce Zaro:
Since the peak in the Dow Jones on May 10th at 11650, the seasonably
unfavorable market period arrived right on queue. Sectors that
had led the market up from November's bottom including steel,
precious and base metals have come down 24%, 20% and 18%
since, respectively. Also, in predictable fashion, these former
leaders have been replaced by the classic defensive issues
like Utilities, Healthcare and Drugs up 1%, down .49% and down
1.34%, respectively.
Short-term Point and Figure indicators are now very oversold
and at levels suggesting a snap back may be close. Many asset
classes like Emerging Markets are 200% oversold, the mirror image
of their position at 200% overbought just 30 days ago!
In addition, many sectors are approaching optimal entry points
where much of the risk has been wrung out.
Aggressive traders can be looking to trade the most oversold
sectors on the first signs demand's re-emergence. Longer-term
investors should be more wary and may want to use any stock market
bounce to lighten up on holdings in preparation for what I expect
will be a more lasting mid-term election cycle low later in the
year. That could prove to be a very worthwhile entry point.
From Michael Pento:
With the simultaneous removal of global liquidity by the world's
central bankers, investors are justly concerned that the result
will be a global recession. I feel there is an elevated risk
that scenario could be realized - call it the second half of
the recession that was postponed a few years ago by Alan Greenspan's
aggressive loosening of monetary policy. However, it is still
possible the data-dependent Ben Bernanke may look at recent
data and pause at the June meeting, a possibility markets are
ignoring at present; indeed, a central banker would likely
conclude that housing and commodity markets are now screaming
for the money supply to increase more quickly (I strongly disagree,
of course). If he does halt the Fed's tightening campaign, the
expected result would be a violent rally in the U.S. markets
and resumption of the U.S. Dollar's decline.
There is a chance that the fed will continue to fight the inflation
that it created and continue tightening, but I believe it is
quickly becoming more likely the Fed will acquiesce and pause
in June, bringing about a short-term reversal in most of the
trends we've seen over the last two weeks. It will be interesting
to see if we get signals to this effect from Bernanke in the
days to come.
From Chip Hanlon:
Sentiment rushing to panic stages: put/call ratio has been above
one in 6 of June's first 8 trading session (7 out of 10 since
Memorial Day), an uncommon string... AAII sentiment survey trading
at bearish extremes (which is a bullish contrary signal for stocks)
not seen since low of May, 2005 (and February 2003 before that).
U.S Dollar not trading very well considering trends in its favor
(rate hike expectations, precious metals correction, flight to
safety from foreign markets)... I still hold the unique view
that the Greenback may be building a huge, multi-year head-and-shoulders
bottom (and the Euro a corresponding top) but the jury's
still out on that one...
I concur with Bruce above that the market is getting washed out.
While it felt a few days ago like a market that could easily
see a down-500 day, the longer this bleed goes on, the less likely
that becomes.
I also agree with Michael above that the market may now be a
bit too certain of a Fed hike at June's meeting; if one believes
Bernanke is a dove - the appropriate viewpoint until he proves
otherwise - then it's reasonable to suspect he'll soon back slightly
away from last week's "hawkish" remarks, leaving the
Fed room to pause when it meets in two weeks. Should such a pause
occur, it would likely bring about a reversal in most of the
trends we've seen over that last two weeks, leading to rising
stocks, commodities and foreign currencies along w/a pullback
in the U.S. Dollar.
-Chip Hanlon
President
website: Delta Global Advisors
email: chanlon@deltaga.com
800-485-1220
Chip Hanlon
is currently the President of Delta Global Advisors and the founder of
Green
Faucet.
321gold Inc
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