NorAm Asset Management, Inc.

Germany and France Get an F

Dan Stewart — Tue, 25 Oct 2011 15:06:34 +0000

10-24-2011

Our markets had a strong day Friday on increasing volume on hopes of a European debt solution being reached this weekend. But Sunday, no solution was reached. European leaders stated they were making progress and promised to continue to work toward a solution.

Merkel stated after the meeting “Today, we will not undertake any decisions, but will undertake preparatory work.” Translation…no agreement could be reached.

The fight is over what writedowns the EU banks and private institutions should take on Greek debt and how to recapitalize the banks quickly. Now that the Greek economy has become even worse, Germany wants larger writedowns and more private sector responsibility.

The European leaders said they have ruled out tapping the European Central Bank (ECB) to increase the rescue fund. If they hold this stance, this is not good for the Euro or the European markets. After the Greek banks, many French banks (ex. BNP Paribas and Societe General) and the German banks (ex. Deutsch Bank) have significant exposure (see chart) to Greek sovereign debt. The 2nd Summit is on Wednesday.

Greek Bank Bondholders

In response, the Euro is weaker against the other major currencies. Our equity futures are down.

I hate to say our markets are dependent on a European solution, but they are, especially the financials. This is probably why the FED is throwing around another stimulus plan even though some of the economic indicators are slowly recovering.

Even though the strong showing Friday may lead investors to believe we have bottomed out, the internals tell a different story. Selling has not abated, and has remained strong throughout this rally along with the increase in buying. In fact, over the past few weeks investors have pulled billions out of equity mutual funds. This demonstrates distribution (selling) rather than accumulation (buying).

You should remain cautious and any buying should be selective. In lieu of a stimulus announcement by our FED, earnings are the only thing that could drive our markets higher. Thus far, they have been mixed. Among the companies reporting earnings today are Caterpillar, Texas Instruments and Netflix.

In overnight trading (Sunday 9:00 p.m. CST) the Asian equity markets are in the green. The US dollar is up against the other major currencies. Silver and oil are both up marginally, and gold is down marginally.

Our US equity markets are in the red. The DOW futures are down -35 points, the S&P futures are down -5 points and the NASDAQ futures are down -8 points.

Earnings, M&A, and the European Overhang

Dan Stewart — Tue, 25 Oct 2011 15:02:57 +0000

10-25-2011

In spite of the European overhang, our markets continued rallying yesterday on lukewarm volume. Most earnings were positive and a few provided positive outlooks. Also, heavy Mergers and Acquisition (“M&A”) activity is driving the market. Netflix reported after the bell and significantly disappointed the market. It was down -$33/share or 28% in afterhours trading.

Tuesday, Texas Instruments, Amazon, UPS, Peabody Energy, Cummins, du Pont and US Steel all report earnings. We have 43 companies in the S&P reporting today so it will be busy. We have 51 companies in the S&P reporting on Wednesday and 62 on Thursday.

Short term, the markets have been showing strength. Up Volume was in the high 80s on the NYSE. On the NASDAQ, it was in the low 90s and qualified for a 90% Up Volume day. All of the technical indicators are showing overbought readings. This means that a short-term pullback is likely. It will depend upon earnings and Europe.

If selling accelerates on high volume, this would be bearish. However, if we get a weak pullback on light volume, this would be bullish and a good entry point. Midterm, we are still in a downtrend and selling has not gone away, even with this rally.

The European rescue is heating up quickly. The banks are fighting back against the European leaders on the size and scope of losses they will agree to incur. European leaders are still trying to figure out how to avoid triggering the credit default swaps (“CDS”). This was the same scenario that caused the banking crisis of 2008 and the collapse of Lehman.

Additionally, Spain is now reporting that it will struggle to meet its deficit reduction targets for the year as their economy slows. This further threatens contagion on the continent.

In overnight trading (Monday 9:58 p.m. CST), the Asian equity markets are mixed with Japan and China both in negative territory. The US dollar is up against other major currencies. Gold is flat and oil and silver are both down marginally, partially due to the stronger dollar.

Our US equity markets are down. The DOW futures are down -29 points, the S&P futures are down -4 points, and the NASDAQ futures are down -7 points.

Go Rangers!!!

Pay Attention to Europe and Our Trading Volume

Dan Stewart — Fri, 21 Oct 2011 15:18:05 +0000

10-21-2011

Investors around the world are waiting on an EU decision. The Asian and European markets sold off yesterday as fears about a solution were put on hold. Our markets were all over the place but were more fortunate than the foreign markets.

The good news is our markets came off their lows of the day and closed near their highs of the day. The DOW and S&P finished in positive territory, but the NASDAQ closed in the red. Our markets are trying to find direction, but very time they try to rally, new sellers enter the markets.

Up Volume was in the mid 60s on the NYSE, but Down Volume barely won on the NASDAQ registering in the low 50s. Total volume was unimpressive on both exchanges. Compared to the recent volatility, it was a dull day.

The internals of the markets are weak right now after bumping up against the upper trading range. Until we get buying with an increase in volume, a sustainable rally is unlikely. However, this could happen if Europe agrees on a fix (even though it won’t work in the long run).

If the markets do rally, energy stocks should do well. On the radio show today, John Sheely, a commodities and forex trader, was talking about the high profit margins with the “crack” spread by refiners. Companies like Tesoro and Valero are worth examining.

But again, unless there is an agreement in Europe, the markets will struggle to go higher. In fact, they will likely go lower and selling could accelerate. Pay close attention to volume, that will be the key.

In overnight trading (Thursday 9:20 p.m. CST) the Asian markets are mixed. Gold, silver, and oil are all in positive territory. The US dollar is flat against the Euro the Yen , but down against Pound.

With the exception of the London exchange, the European futures are in negative territory. Our US futures are in positive territory. The DOW futures are up 29 points, the S&P futures are up 3.2 points, and the NASDAQ futures are up 6.75 points.

No Solution in Europe Yet, Germany and France Walk Away From the Table

Dan Stewart — Thu, 20 Oct 2011 15:22:13 +0000

10-20-2011

When push came to shove, Germany and France just didn’t quite see eye to eye and walked away from the table. Germany feels the private sector, the banks and institutional investors (pension funds etc.), should accept bigger losses. The French don’t want bigger losses for the private sector as their banks have bigger exposure to Greece. Either way, taxpayers will ultimately have to “recapitalize” the European banks in the form of bailouts.

Our markets didn’t like the news. With the exception of the NASDAQ being down all day due to Apple missing earnings estimates, the DOW and S&P were in positive territory until afternoon trading. When all was said and done, all 3 indices closed near their lows of the day… not a good sign.

Down Volume was in the low 80s on the NYSE and in the high 70s on the NASDAQ. Total volume was down on the NYSE, but up significantly on the NASDAQ. Therefore, it was a “distribution” day on the NASDAQ.

Amid stocks giving disappointing news on either earnings or forward guidance were American Express and EBay. The overall tone of this earnings season thus far is one of a slowdown and downward revisions going forward.

I stated in my newsletter yesterday that I purchased the ProShares Ultra NASDAQ 100 (QLD) because of the news of a big European bailout and expectations of good news from Apple. Once Apple disappointed, I stated I would reverse the trade (cover and move to cash) if the market showed weakness today.

That is exactly what I did. The NASDAQ opened down around -17 points, but then drifted higher in the morning as the overall market was gaining strength, and at one point was down only around -5 points. Then in early afternoon, selling on heavier volume began to enter the markets and I quickly covered (sold) my position in QLD. The NASDAQ finished down over -53 points, or -2% so it turned out to be the right move.

There are a lot of undercurrents for the weak markets. Inflation is coming in hot and company news is coming in weak. Mortgage applications were down -15% from last week. But the real wildcard is Europe. Until Europe formalizes a plan, the markets will continue to sell off.

In overnight trading (Wednesday 10:55 p.m. CST) all the Asian equity markets are in the red. Gold, silver, and oil are all in negative territory. The US dollar is flat against the Yen, but up against the Euro and Pound.

Our US equity futures are in the red. The DOW futures are down -6 points, the S&P futures are down .25 points, and the NASDAQ futures are down 1.50 points. On the brighter side, they have recovered from earlier levels.

2 Trillion Euro Bailout Trail Balloon Announced

Dan Stewart — Wed, 19 Oct 2011 15:28:21 +0000

10-19-2011

The Producers Price Index (PPI) came out hot indicating there is in fact inflation coming through the system. The markets began on a sour note yesterday and looked to be a follow through down day. We had a mixed bag of earnings. Even though a few banks had some good news, it was primarily due to accounting gains. Goldman Sachs actually had a loss.

Technology was also mixed. Yahoo’s profit came down but still beat estimates as did their revenue. Intel beat forecast and guided higher going forward. But Apple surprised everyone, including myself, by missing earnings and revenue expectations.

But buying entered the market as the European meetings went on throughout the day. Late yesterday afternoon with an hour left in trading, France and Germany are “ready to agree on a 2 trillion Euro rescue fund” according to the Guardian (London) as part of a “comprehensive plan” to solve the debt crisis. This comes as rating agency Moody’s warned it might review France’s AAA rating.

France’s sovereign debt yields have been rising quickly so Germany and France had to move quickly. The problem is Moody’s is reviewing France due to their rising cost of bailing out other Eurozone countries and its own banks.

Overall volume increased by double digits from Monday’s selloff on both exchanges. The NYSE qualified for a 90% Up Volume day, and Up Volume on the NASDAQ was in the mid 70s. The NASDAQ, has however, broken through its 2 month trading range and resistance (see charts). The DOW and S&P still have yet to break out of their trading range, but are fast approaching that level.

NASDAQ (Year to Date) Breaking Through Resistance on 10-18-2011

NASDAQ (2 Month Trading Range) Breaking thru Resistance on news of the $2 Trillon EU Bailout 10-18-2011

Make no mistake, this is due to stimulus and bailouts, not to economic strength which is reversing. Once the 2 trillion European bailout trial balloon was announced, the market began going higher into the close on increasing volume.

In response to the European bailout and because of my (incorrect) expectations of Apple beating estimates after the bell, I purchased the ProShares Ultra NASDAQ 100 (QLD) just before the close. I had a profit 10 minutes later at the close, but it went against me in afterhours trading.

It is a trade, nothing more. If we don’t have a positive, follow through day in the morning, I will quickly unwind this trade. Cash is still king due to the all uncertainty and I still hold a lot of cash.

In overnight trading (Tuesday 9:38 p.m. CST) the Asian equity markets are mixed. The US dollar is down against the Yen, and essentially flat against the Euro and Pound. Gold is in positive territory, but silver and oil are down.

Our US equity futures are also down. The DOW futures are down 37 points, the S&P futures are down 6.25 points, and the NASDAQ futures are down 21.75 points. If things hold overnight, I will likely be unwinding my trade quickly.

Germany & France to the Rescue – Possible Short Squeeze

Dan Stewart — Thu, 13 Oct 2011 18:53:13 +0000

10-10-2011

The markets ended their 3 day winning streak on Friday. The S&P and NASDAQ were down -.82% and -1.1% respectively, and the DOW was down only marginally. The DOW’s smaller decline can be explained by a few mega stocks, namely Intel and Wal-Mart, up strong and therefore skewing the index.

However, we will likely get a strong bounce at the open today as Germany and France have both agreed to “recapitalize” the European banks. German Chancellor Angela Merkel joined French President Nicolas Sarkozy to persuade investors they can stop the European debt crisis from roiling global markets.

Merkel said European leaders will do “everything necessary” to ensure their banks have adequate capital. Both set a deadline of the November 3rd Group of 20 Summit meeting to provide details to address the crisis and “the structural defects in the 17-nation euro area.”

“By the end of the month, we will have responded to the crisis issue and to the vision issue,” Sarkozy said. Merkel said, “We’re determined to do everything necessary to ensure the recapitalization of our banks.”

I have only 3 questions. Although Germany has enough capital to help, what will their people say about the move? Second, where is France going to get the money? Lastly, how long will it be before there is more infighting once the details are released and countries are asked to provide capital.

This is another example of news driving the markets in the short term. The politicians are trying to “talk up” the markets, but in the long term, nothing has changed.

On a negative note, short selling has been increasing worldwide to the highest levels since 2006. According to Data Explorers, a London-based research firm compiling data for Bloomberg, short selling “climbed to 11.6% last month from 9.5% in July.”

This may actually be good news for bulls though as with any bounce, you will get a “short squeeze.” This is where short sellers have to cover their shorts thereby accelerating any rally.

Either way, it will be an interesting week. Even though we are in a bear market, you can have strong bull rallies within a bear market. Tuesday and Wednesday will determine whether this is a longer rally within a bear market, or simply a bounce that has lost its steam.

In overnight trading (Sunday 9:40 p.m. CST) the Asian equity markets are mixed. The US dollar is up against the Yen, but down against the Euro and the Pound. Gold, silver, and oil are all in positive territory in Asian trading.

Our US equity futures are in positive territory. The DOW futures are up 103 points, the S&P futures are up 10.70, and the NASDAQ futures are up 23.75 points.

Price Volume Divergence

Dan Stewart — Tue, 11 Oct 2011 19:06:11 +0000

10-11-2011

All the market indices ended much higher in Monday’s trading on the promises of a European debt crisis solution by France and Germany. No details were given but German Chancellor Merkel and French President Sarkozy said they were unified and would provide details early next month. Gold, silver, and oil all followed suit and had a big day as well.

Although Up Volume was right at 90% on the NYSE, the only problem was low total volume. Total volume was down by almost 30% on the NASDAQ and over 25% on the NYSE. This is known as price/volume divergence. It is where prices of stocks go up but volume is weak.

I said in yesterday’s newsletter that today, Tuesday, or even Wednesday would be key in determining the sustainability of the rally. Demand has definitely been increasing, but supply, or selling, has not dropped off dramatically. You want to see supply shrink in order for the next leg up in a sustainable rally. Over the next few days you need to monitor selling to see if it continues to contract or begins expanding.

Luckily the bond market was closed due to the Columbus Day holiday. If the bond market was open, treasuries would have gotten hit hard with such a strong rally in stocks. It will be interesting to see how treasuries respond today.

In overnight trading (Monday 10:00 p.m. CST) the Asian equity markets are in strong positive territory. The US dollar is flat against the Yen but stronger against the Euro and Pound. Gold and silver are continuing to rally, but oil if off marginally.

Our US equity futures are in negative territory. The DOW futures are down 33 points, the S&P futures are down 4.25 points, and the NASDAQ futures are down 7 points.

Over There, Over There, What’s Happening Over There

Dan Stewart — Fri, 07 Oct 2011 18:50:40 +0000

10-7-2011

The markets continued their rally yesterday for the 3rd day after the brutal selloff. Advancers beat decliners by 5 to 1 on the NYSE and 3 to 1 on the NASDAQ. Total volume was down from Wednesday but still healthy.

We just qualified for a 90% Up Volume day on the NYSE and registered in the high 80s on the NASDAQ. Although the percent gains were slightly higher on the NASDAQ, the internals were actually weaker.

Demand has been strengthening but supply has not been weakening. The the rally is likely to be short term in nature. If demand slows at all, you will see a reversal in the markets. The spread between demand and supply has to widen for a sustainable rally.

Fundamentally, this rally has been based upon a “solution” in Europe. Their recent solution is for each country to guarantee each the other’s sovereign debt. Italy would back Portugal, Spain would back Ireland, etc. The problem is all of these countries are struggling with their own debt. It would be like a bankrupt company cosigning a loan for another troubled company. This is what the European finance ministers are actually proposing.

One big problem is that Germany hasn’t committed to this. Germany is the only economy with enough strength to make a difference. Without Germany, these are hollow promises.

Instead, Germany and the International Monetary Fund (IMF) have proposed that the IMF buy sovereign debt from countries. Yet the IMF gets their money primarily from the European nations and from the United States. This is circular reasoning. This is a way for the FED to come in through the backdoor via the IMF and bailout Europe, putting taxpayers at risk, but not formally bailing out Europe. It is simply providing capital to the IMF.

This means there will be more printing by the European Central Bank (ECB) and our FED. England has already started by announcing a stimulus package of 75 billion pounds (115 billion $US).

This will only be bullish for gold and silver and both had positive day on the news. Precious metals will remain in a primary uptrend rather than just a rally.

Back to our equity markets, earnings estimates of companies are already being massaged downward for most sectors. Day to day, there is not much correlation between stocks and earnings. It is primarily news driven. But longer term, there is a strong correlation between earnings and stock prices.

The bottom line… expect more bailouts and stimulus from both the US and Europe. Expect volatility to continue in the short term with swings, and big up and down days. The short term will tilt toward a rally if Bernanke announces a stimulus package. If not, the trend after this short-term rally is down.

In overnight trading (Thursday 9:50 p.m. CST) the Asian equity markets are in positive territory. Gold and silver are also in positive territory. The US dollar is weaker against the Yen and Pound, but stronger against the Euro. Expect the Euro to continue to come under pressure. Even ECB President Trichet said “the Euro will be around in 10 years” trying to talk up and bolster confidence in the Euro.

Our US equity markets are down modestly. The DOW futures are down -16 points, the S&P futures and NASDAQ futures are both flat.

Short Term Rally in a Bear Market

Dan Stewart — Thu, 06 Oct 2011 18:45:53 +0000

10-6-2011

The European markets all had a big day yesterday. Their rallies were based upon European leaders agreeing to recapitalize their banks. It is not about Greece at all, but the banks.

European leaders are trying to buy time with Greece so they can strengthen the banks. Once this is accomplished, Greece will be allowed to go bankrupt. Bankruptcy is imminent for Greece, just the timing that is in question.

Although not nearly as strong as the European markets, our market followed suit posting solid gains with a positive follow through day after Tuesday. The NASDAQ displayed the strongest gains well over 2% with Up Volume in the high 80s. The NYSE gains were in the neighborhood of 1 3/4% with Up Volume in the high 70s.

Breadth was positive with advancers beating decliners by 5 to 2 on the NYSE, but surprisingly, only by 2 to 1 on the NASDAQ. Total volume decreased significantly from Tuesday, but this is not alarming as Tuesday’s volume was unusually heavy. Total volume was still above its 30 day moving average (30 DMA).

There is not any significant resistance for at least a few 100 points on the DOW, so we may have legs to this rally. You still need to remain cautious, though, as the economic data is weak and getting worse. This likely will be a short term rally in a bear market. Remember, the strongest rallies actually occur in bear markets.

This rally is based upon bailouts to the European banks and the belief that more stimulus in the US is on the way, and not because of a strong recovery and expanding demand. Initial Jobless Claims and the US ICSC (International Council of Shopping Centers) Chain Store Sales come out today and will provide clues as to which way the recovery is trending.

In overnight trading (Wednesday 9:04 p.m. CST) all of the Asian equity markets are in strong positive territory (Chinese markets are still closed due to holiday). Gold, silver, and oil are all flat. The US dollar is down marginally against Yen, but up against the Euro and Pound.

Our US equity futures are in the red. The DOW futures are down 16 points, the S&P futures are down 2.25, and the NASDAQ futures are down 15.

Is the Reversal Sustainable?

Dan Stewart — Wed, 05 Oct 2011 14:00:35 +0000

10-5-2011

The markets started the day on a very negative note and the DOW was down 250 points but regained some of the losses during the early afternoon. Then sold off again, but had a strong reversal in the last hour of trading.

The near vertical ascent saw the DOW close up 153 points (see graph). The range was over 400 points, but the reversal was not on any substantive news, just rumors of a European agreement to bailout their banks.

DOW 1 Day – Reversal Last Hour 10-4-2011

All of major indices displayed this similar pattern with the NASDAQ being the strongest. Down Volume was the victor throughout the day until the final hour. Up Volume quickly won with the reversal. Up Volume was in the mid 80s on the NASDAQ and almost 90% on the NASDAQ. The small and mid cap indices displayed even more impressive gains.

Total volume increased across the board with over 6.7 billion shares traded on the NYSE and almost 3 billion shares traded on the NASDAQ. This is an increase of almost 20% on the NYSE and over 20% on the NASDAQ.

During the morning trading, the DOW blew through 2 levels of support – 10,575 and 10,440. The reversal not only brought the DOW above both of these important levels, but brought it back above the lower support of the trading range it has be locked in over the past 2 months.

The real question is whether this reversal is sustainable. The answer will lie in any follow through on strong volume. The absence of strong volume to the upside would indicate we are headed lower in a continuation of the bear market.

If we get strong buying volume, this would indicate we have established a short term bottom. If you are an active trader, you will be able to take advantage of a short term move to the upside. Longer term investors still need to remain cautious.

We are entering earnings season, and in my opinion, earnings are going to come out weaker than the previous quarter in most sectors. Without more stimulus, the economy will fall back into recession.

You should remain defensive. Utilities remain one of the strongest overall sectors while the banking sector remains the most uncertain and risky. This is due to pending lawsuits by states over the subprime mortgages and exposure to Europe.

In overnight trading (Tuesday 10:10 p.m. CST) most of the major Asian equity markets are in the red (China is closed due to holiday). The US dollar is down against the Yen, but up against the Euro and Pound. Gold and oil are both up, but silver is down 1/4%.

Our US equity futures are in the red. The DOW futures are down 24 points, the S&P futures are down 2.50 points, and the NASDAQ futures are down 3.50 points.