S&P 500: Did the 13.74-Point Rally Finish the Move?
From an Elliott wave perspective, there was a good reason for the June 15 rally 
June 19, 2012

By Elliott Wave International

There were few “fundamental” reasons to be bullish on U.S. stocks on Friday morning (June 15).

If anything, the news that the U.S. unemployment rose in 18 states in May sounded downright bearish. But stocks rallied anyway — for a seemingly unlikely reason, explained the pundits: Because all the bad news lately makes it likely that the Fed will step in again.

(Just as a side note, how many times did the Fed “step in” in 2007-2009 while the DJIA was dropping from over 14,000 to below 6,500? But hey, that’s ancient history, and besides — “it’s different this time,” right?)

From an Elliott wave perspective, there was another reason for the June 15 rally: the S&P 500 had some unfinished technical business on the upside. Here’s what the editor Tom Prindaville wrote on Friday morning in EWI’s U.S. Intraday Stocks Specialty Service (try it free now, during June 14-21 FreeWeek):

S&P 500 (Intraday)
Posted On: Jun 15 2012 9:30AM ET / Jun 15 2012 1:30PM GMT
Last Price: 1331.33

Trade pushed beyond the 1319.74 level yesterday…[which] is significant because it implies that, minimally, the S&P wants to take a closer, more deliberate look at 1338, and the overall proportionally of the recent Elliott wave action backs that up. For today, persistence atop 1319.74 is needed to see the very near-term trend up with a minimum upside target of 1338.32.

The S&P 500 closed trading on June 15 at 1342.84, exceeding the bullish price target U.S. Intraday Stocks Specialty Service gave on Friday morning by 4 points.

European Central Bank: “Great White Fear” Takes A Bite Out of Recovery
EWI’s Global Market Perspective foresaw the shift in European banks from lenders to savers via one remarkable chart 
April 23, 2012

By Elliott Wave International

It’s been over two years since the European Central Bank began its open-heart surgery of the eurozone’s anemic economy. So far, the procedure has included an unprecedented $3 trillion-plus in bailouts, monetary transfusions, AND toxic debt transplants.

Yet, according to a recent slew of discomforting news reports, the economies across the pond would still flatline in seconds without constant life support. Here, an April 18, 2012, Wall Street Journal writes:

“Europe Hemorrhages through Refinancing Operation Band-Aid” and reveals that Europe’s banking sector has wolfed down three years of Long Term Refinancing Operations (LTROs) in under four months.

The question is — what went wrong?

Well, to answer this, we have to go back to the drawing board to mid-2010. It was then that the European Central Bank and company released the rescue-package Kraken via a $1 trillion bailout of Greece and a full-fledged initiation of its LTRO.

And, as the following May 10, 2010, news items make plain, this credit-reflating beast was set to tear Europe’s economic bear to shreds:

• “This is shock-and-awe, part II, in 3D, with a much bigger budget and more impressive array of special effects. The EU package eliminates the danger that Greece’s debt woes will ricochet through Europe’s banks.” (USA Today)
• “This is a truly overwhelming force and should be more than sufficient to stabilize markets, prevent panic and contain the risk of contagion.” (Bloomberg Businessweek)

In the July 2010 Global Market Perspective, however, our analysts foresaw a fatal flaw in the plan. The first part was fine: The European Central Bank (ECB) bought packages of debt and resold them to smaller banks at a historically low interest rate.

BUT the second part didn’t work out: Instead of rebundling those loans and passing them on to small businesses to stimulate investment, THOSE banks redeposited the funds with the ECB. Riffing off the famous “Jaws” quote (“We’re gonna need a bigger boat”), the July 2010Global Market Perspective captured the great-white fear circling the lending sector via the following chart of commercial banks’ usage of the ECB’s Deposit Facility and wrote:

“The chart roughly indicates the degree to which banks fear for the insolvency of one another. Banks receive below-market interest rates on their ECB deposits, so they’re generally loathe to hold significant funds there. As anxiety grows, however, so do banks’ deposits in the Facility, mainly because their desire for adequate interest gives way to their more essential need to safeguard principal … Because the [economic downturn] is still young, deposits at the ECB will likely keep rising. Like stocks, the casual approach to banking that existed up until now is in for a massive shift.”

Flash two years ahead. The April 2012 Global Market Perspective’s updated chart below shows that usage of the ECB’s Deposit Facility has indeed risen, nay doubled, since the original forecast.

The question now is not whether monetary policy will save Europe’s economy, but whether the one precondition for recovery — confidence — will return to lenders.

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The Biggest Bubble of All: This One Has Yet to Deflate (Are You Ready?)
More Threatening Than Any Single Economic Sector 
April 20, 2012

By Elliott Wave International

History shows that once a financial bubble bursts, it can take a long time to bounce back.

Recent history offers an example: Real estate prices topped in 2006-2007 — then came the worst part of the sub-prime mortgage crisis in 2008.

Yet instead of recovering with the passage of time, real estate prices just keep getting worse:

Home prices dropped for the fifth consecutive month in January, reaching their lowest point since the end of 2002.

– CNNMoney, March 27

As values sink and desperation grows, the number of owners giving their timeshares away for $1 — or less — has doubled in the past year, says Brian Rogers, of Timeshare Users Group, an owner advocacy group. “There’s never been a worst time to try to sell a timeshare,” he says.

– SmartMoney, April 4

Observers have called for a bottom numerous times in the five or so years since the bubble burst.

Again, this is what can happen. Recovery can take far longer than many expect.

Real estate is just one sector of the economy. Let’s consider another sector:

According to Citigroup economist Steven Wieting health care is the next big bubble looming in the distance.

And to make matters all the more worrisome, his analysis suggests it’s like nothing we’ve seen before.

– CNBC.com, April 12

Although health care is a huge part of the economy, it’s still just one sector. Let’s consider yet another sector:

The amount Americans owe on student loans is far higher than earlier estimates…Total student debt outstanding appears to have surpassed $1 trillion late last year…That would be roughly 16% higher than an estimate earlier this year by the Federal Reserve Bank of New York.

– Wall Street Journal online, March 22

As big as each of the above sectors are, they are just a fraction of the bigger picture:

…the property market, to me, was a microcosm…of what shape the whole world is in right now — in debt up to its ears and ultimately unable to pay. And that’s what crushed the real estate market and I think it’s going to crush…the entire debt market across the globe…Nobody’s worried…

– Robert Prechter, Financial Sense Newshour interview, March 22

Far from being worried, lenders are once again trying to push credit on risky clients:

[A Brooklyn resident] just emerged from bankruptcy and doesn’t have a job, and her car was repossessed last year. Still, after spending her days job hunting, she returns to her apartment in Brooklyn where, in disbelief, she sorts through the piles of credit card and auto loan offers that have come in the mail.

– New York Times, April 10

As bubbles balloon in individual sectors of the economy, the psychology of the pre-financial crisis days have returned.

That’s why it’s important to remember that hardly anyone was concerned about the real estate market in 2006. Then the whole house of cards fell in.

Now consider the entire global debt market: the biggest bubble of all time.

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Stock Market Turning Points: Has Wall Street Ever Warned You in Time?
Divorce yourself from the crowd. Independence is good. 
April 19, 2012

By Elliott Wave International

In the play “The Secret to Freedom,” Pulitzer prize writer Archibald MacLeish had a character say this:

The only thing about a man that is a man is his mind. Everything else you can find in a pig or a horse.

MacLeish knew how to state the truth plainly.

And the truth is, you can use your mind in any way you wish.

When it comes to financial markets, most allow others to do their thinking for them. You’ve heard the phrase “the blind following the blind.” Yes, they both fall into the ditch.

At Elliott Wave International, our mission is to keep our subscribers out of the ditch. To do so, we must first do our own financial thinking before offering our conclusions to subscribers.

Robert Prechter found it easier to think independently by being physically removed from Wall Street. In this excerpt from the book Prechter’s Perspective, Prechter was responding to an interviewer who asked about Prechter living 60 miles north of Atlanta:

It’s an advantage in my opinion to be away from the storm of mass psychology that exists in the financial centers. I have purposely distanced myself from New York to avoid the overload of superfluous information that you are exposed to there. I am an observer of crowd behavior. I think it is extremely difficult to shield yourself from the crowd’s influence when you are part of it.

Now, we don’t advocate contrarianism for its own sake. That would be just as big a mistake as letting the Wall Street crowd do your thinking for you.

That said, our financial analysis is born of deliberate independence.

Granted, the crowd might be right for a time, but generally not for long, and never at important turning points.

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How to Handle an Economic Implosion

April 18, 2012

By Elliott Wave International

I came across some research on the subject of worry. Here’s how it was presented:

Things People Worry About:

• things that never happen – 40%
• things which did happen that worrying can’t undo – 30%
• needless health worries – 12%
• petty, miscellaneous worries – 10%
• real, legitimate worries – 8%

Of the legitimate worries, half are problems beyond our personal ability to solve. That leaves 4% in the realm of worries people can do something about.

I thought about our gigantic national debt and weak economy. These seem to fit into both subcategories of “real” worries. You can’t do much as an individual to solve the nation’s debt and economic problems, yet you can prepare for a worsening economic downtrend.

Do we see evidence for an economic turn for the worse?

Well, consider that the evidence is so overwhelming that it took 456 pages of the second edition of Robert Prechter’s book, Conquer the Crash, to cover it. And since that book published, Prechter has consistently devoted his monthly Elliott Wave Theorist to the facts and evidence behind his forecast.

Here’s a chart from the book that was updated by Elliott Wave International in March 2012:

The downturn from 2008 is critically important, as it shows that after an almost unbroken 60-year climb, the contraction is underway. It surely has much further to go, because it is still a third higher than it was at the outset of the last debt deflation in 1929.

– The Elliott Wave Financial Forecast, March 2012

The rating agencies are well aware of what the above chart means. You probably know that Standard & Poor’s downgraded U.S. debt from the nation’s long-standing triple-A to AA+. Now, another rating agency has taken their rating even lower:

Rating firm Egan-Jones cuts its credit rating on the U.S. government to “AA” from “AA+” with a negative watch, citing a lack of progress in cutting the mounting federal debt.

– CNBC.com, April 5

Robert Prechter’s bestseller, Conquer the Crash, provides practical information about what you can do to protect your finances in the coming economic implosion. And right now, Elliott Wave International is offering 8 lessons from Conquer the Crash in a free 42-page report that covers:

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Public Pension Funds: Tens of Billions at Significant Risk
Is now the time to gamble with retirement? 
April 04, 2012

By Elliott Wave International

To meet ambitious investment return targets, some public pension funds must now swing for the fences.

But many are down two strikes already, due to their previous big bets with hedge funds.

….the [pension] funds with a third to more than half of their money in private equity, hedge funds and real estate had returns that were more than a percentage point lower than returns of the funds that largely avoided those assets. They also paid nearly four times as much in fees.

New York Times, April 1

The same article describes how other pension funds have embraced this risky strategy, and how funds generally have their assets at risk. In 2007 pension funds allocated 10.7 percent to “high-growth” investments; by September 2011 they had increased that bet to 19 percent. All the while, hedge funds have underperformed, as this chart from our January 2012 Financial Forecast shows:

The [HFRX Global Hedge Fund Index] hit a new low on December 14, producing a rash of articles about how hedge funds got tripped up in 2011. “Many hedge-fund managers who came into 2011 riding a wave of momentum ended the year scratching their heads and nursing losses, whipsawed by markets that seemed to punish them month after month.” “Head scratching” is just right for this still-early stage of the bear. Through the first ten months of 2011, 123 Asian hedge funds shut their doors, the second highest number of closures since 2008, the year world markets collapsed.

Financial Forecast, January 20

The California Public Employees’ Retirement System (CalPERS) is the nation’s largest public pension fund. It recently lowered its investment return target from 7.75 percent to 7.5 percent. The system’s actuary had recommended lowering it to 7.25 percent.>

The CalPERS board members were told by their staff that they had only a 50 percent chance of hitting or surpassing the 7.5 percent target, yet they adopted that assumption. Others say the odds are even worse than that.

If CalPERS loses the bet, as it is likely to, the next generation will pay the shortfall…

….if CalPERS or any other public-pension system banks on higher-investment returns, it must take greater risks to meet the target…Cal-PERS chief investment officer told Pensions and Investments newspaper last year, his system has “a reasonably ambitious return target” and “needs to have a portfolio with a lot of growth exposure.”

San Jose Mercury News, March 24

Is now the time to take greater risks? You saw the 2011 performance of hedge funds, and that was a year when the DJIA was up. Imagine the scenario if the market takes a serious tumble.

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Euro Pressure Continues

Festive cheer in the market seems to be running out as we move towards the end of the first trading week of 2012. Disappointing Italian and Spanish PMI data more than offset a decent German figure and the Euro-zone is looking more and more likely to be heading into another recession.

The Euro was under pressure for most of yesterday as risk was dumped and the US Dollar strengthened. The theme is continuing this morning as the single currency continues to be sold; European banks continue to make headlines for the wrong reasons as they park newly created ECB cash back at the central bank rather than lending or investing it in the real economy.

Retail gloom continues to hang over the UK with many of the retailers reporting crucial Christmas figures this week. NEXT shares were pummeled after they reported disappointing sales over the festive period and set a gloomy tone as we wait for results from rivals M&S. John Lewis were a ray of light in the gloom, posting impressive sales growth compared to last year, but most if not all retailers are suggesting that economic conditions remain a real concern and are expecting a challenging year.

The Pound has opened the year in much the same way as it finished the last, namely taking a back seat to the Euro and Dollar with economic fundamentals remain less of a driver than politics.

Data from the US this week has been mixed, ISM manufacturing and Auto sales both showed growth month-on-month ahead of the consensus estimates but factory orders disappointed coming in on the lower side of estimates.

The market is hoping for a clear sign of the economic picture on Friday from the Non-farm payrolls, either showing the recovery continuing or a worsening picture and the prospect of further QE this year. More likely is that the number shows the US economy to the chugging along slowly, leaving both the Fed and the markets disappointed.

Focus on Eurozone

Renewed pressure on euro as the single currency falls to 15-month low versus pound and nears decade low versus yen as investor focus returns to eurozone debt. Risk appetite drives the ‘loonie’ strength of the Canadian dollar, which is now C$1.32 to the euro, is correlated to firmness in growth-focused assets, particularly commodities.

Asian shares lose ground on Europe fears. Stocks stumbled, led by financials and exporters, as investors shifted their focus back to Europe’s debt crisis.

India woos foreign capital to regain lost sheen widening the investor base has been welcomed but few analysts expect to see immediate results. SNB publishes ethical code after currency trades. Political storm over the transactions conducted by Kashya Hildebrand, former foreign
exchange trader married to central bank chairman.

Busy Week For The US Dollar

The Euro has opened lower this morning, sitting below the critical 1.30 barrier as markets remain nervous as to the steps that the Eurozone will take to curb the crisis. In major trading, the US Dollar managed to gain further strength last week trading to a low of 1.2860 at the end of 2011, which was the lowest in the final quarter of 2011. Data from the region, saw manufacturing figures come in from France, Germany and Switzerland, which was higher than previous months for all countries, though not reflecting a drastic expansion as it lay below the median figure of 50.

With regional banks stepping up their deposits in the ECB, panic had started to set in, but the announcement from the ECB last week that these deposits were receding, have calmed fears momentarily. We have had some positive data from Germany, as far as unemployment figures go, pushing the Euro towards the critical support level of 1.30 against the greenback. As we go into the week, we expect further data from Europe on Services PMI and construction figures, which will lend to trading patterns of the Euro, intermittently.

We are straight back into a busy week for the US Dollar with ISM manufacturing out this afternoon along with the minutes of the previous Federal Reserve meeting from the 13th December. On Friday the US non-farm payroll number is also released, with the consensus for around 150K jobs being added over the previous month.

Today also marks the official start of the presidential elections with the voting beginning in the first republican primary in Iowa. A victory by the favorite, Mitt Romney may mean the race is over before it began with Mr Romney holding a 20 point lead in the next state to vote, New Hampshire.

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