DOW at Crossroads

chart courtesy of www.stockcharts.com

The market received its much anticipated interest rate hike this week. The Federal Reserved opted to increase rates by 0.25% thereby ending an historic period of easing. The market reacted with a powerful rally upon the news announcement. The next date saw sharp declines among broader markets. This historic tightening occurred while the rest of the world is focused on easing rates as an attempt to stimulate growth.

There are 3 reasons why interest rate tightening will have a negative effect on markets:

1. An already strong US dollar will be made even stronger. This will be a negative for corporate earnings of the US multinationals. And their products become less price competitive with the rest of the world.

2. An already weak oil market will see prices drop even further since oil is priced in US dollars. There is an inverse relationship between the price of oil and the strength of the US dollar. The second tier oil producing nations are already struggling with deficits from weak oil prices. Their problems just got worse as oil is now trading below $40 per barrel with no relief in sight.

3. Banks already have starting increasing rates which they charge borrowers but they have not yet started to raise rates which they will pay depositors. The cost to purchase homes, cars, and other loan financed items just increased.

The junk bond market has already been selling off in preparation of the interest rate hike. Liquidity has essentially dried up for these instruments as investors have sold off. At least one fund has halted redemptions of their fund because of lack of liquidity. When this happens investors who need to raise cash are forced to sell off other assets that are more liquid. Also the issuers of these high interest paying instruments will be under stress as they will have to pay even higher rates in order to refinance their debt. This same type of thing happened at the beginning of the Financial Crisis in 2009. It is too early to tell how this will affect the broader markets but most assuredly it will be negative.

Don't believe the so-called experts who are essentially saying "Take your medicine, its good for you." The Fed has painted itself in a corner. Do they keep raising in order to "normalize" rates? even when the rest of the world is still easing? Or do they sit tight and do nothing. Worst of all, do they have to reverse their position as the above consequences take effect. Most money managers have not seen a rising interest rate environment.

The above chart shows how the DOW is now sitting at major crossroad levels with its moving average. One may simply refer to the IBM chart posted last week for a hint on where things might go from here. As one reporter last week put it, "the last two cycles of interest rate tightening did not end well for the US economy."

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IBM Still a Good Predictor of Markets

charts courtesy of www.stockcharts.com

IBM has fallen out of favor lately by the self-proclaimed tech experts. However, one should not discount the rich history of this important tech stock. The major stock indexes have been skewed to include the darlings of the tech industry that never seem to fall out of favor with investors (e.g. Apple, Google, etc.). But for a true picture of what is going on with the large caps it can be important to see how IBM has been performing. The above two charts illustrate this point.

The Dow 30 stocks ($INDU) have put together a good rally as of late. One can argue they are being held up by the above mentioned "darling" stocks which control a significant percentage of the stock indexes and how they are calculated. The IBM chart shows a clear breakdown and continuation of its downward trend even with good earnings expectations. "Big Blue" IBM historically has been an accurate bellweather for the direction of the market. Therefore, it might be prudent to pay attention to the IBM chart for a glimpse of where things might go from here.

The Fed is still talking about raising interest rates.. now in December. At this point they are grasping for reasons to raise interest rates when the rest of the world is talking about easing. Some speculate that IBM is pricing in the negative effect that higher rates will have on the US dollar and multinational corporations. But for now the so-called experts want to keep talking about how great Apple, and Google, and the rest are. They used to talk about Dell computer that way too... Just sayin.

Disclaimer: The above is for information purposes only. Any decision to buy, sell, or hold any specific investment for your portfolio should be reviewed by your investment adviser.

More Volatility Ahead

chart courtesy of www.stockcharts.com

The past few weeks have proved quite a roller coaster ride for traders and investors alike. We have seen several hundred point swings intraday. This volatility has offered numerous day trading opportunities. Markets do not like uncertainty and the recent Fed decision not to raise interest rates has not helped. Pundits continue to speculate what the Fed's next move will be. All of this is just speculation of course. What is certain is that the Fed would have worsened the problem if they raised rates. A so-called "hard landing" would have been virtually guaranteed. The global economies ARE connected and we simply cannot choose to ignore them when they continue to weaken.

If the recent global data continues unchanged we can expect to see more selling pressure. The Chinese data is awful. They are no longer able to present a rosy picture of their own economy. The smoke and mirrors are broken. Market forces are taking effect. This is as it should be.

The Dow will most certainly test its 15380 level over the next few weeks. All of the technical charts are pointing to a move lower as the market backs and fills. If the retest holds we will have an intermediate bottom similar to 2011. While weakness abounds it does not mean the end of the world! In fact we will continue to have great buying opportunities in energy, commodities, and manufacturing. Many of the old line manufacturing companies still have strong cash flow and they are paying 2-3% dividends.

Note: The above is for informational purposes only. Any decision to buy, sell, or hold a specific investment for a portfolio should be reviewed by your investment adviser.

Buying Opportunity. The Case for Free Markets.

chart courtesy of www.stockcharts.com

The recent market plunge has created interesting buying opportunities. The US economy remains one of the strongest in the world. Even with the strong dollar US comparnies remain attractive. Three rounds of quantitative easing have resulted in a modest recovery. The case for free markets remains intact.

Recent market volatility was caused by 2 major factors:

1. Uncertainty at the Federal Reserve. While the REST OF THE WORLD is talking about easing monetary policy to stimulate growth our own Fed will not rule out a rate increase at its September meeting. As a poor poker player not wanting to reveal a hand so is the Fed's rhetoric about having to raise rates. They missed their chance. The world economic slowdown has done the work of a rate increase for them. Now they are stuck unless they want to plunge the US economy into recession. Make no mistake a rate increase would have negative resounding effects throughout our economy. And it would create an even stronger dollar as world investors seek to take advantage of the higher US rates.

2. Uncertainty in the Chinese markets. The recent selloff in the East has somehow been blamed on the reporting of a few journalists and market speculators. This propaganda has only caused the markets to become more unstable. Everybody knows the Chinese economy was in trouble for some time. Their real estate bubble was bigger than our own in the United States. And the average Chinese citizen was actively encouraged to invest in the financial markets without understanding the risks.


Chinese financial journalist Wang Xiaolu is forced to "apologize" on national TV for his role in reporting the financial climate in China. Apparently his crime was not clearing his factual reporting with the Chinese government before making it public. Somehow this was deemed to have caused the 25% pullback in Chinese markets.

As always the market does not like uncertainty. We can expect a retest of last weeks lows as the market backs and fills itself from the imbalances caused by the volatile trading sessions. The US companies remain one of the best places to invest. Many companies are sporting a handsome dividend and they are in a better financial position than most banks. These value stocks in several sectors offer a great buying opportunity after being beaten down. Sometimes the "experts" need to leave the markets alone. Their interference will only make things worse.

Note: The above is for informational purposes only. Any decision to buy, hold, or sell a specific investment for your portfolio should be reviewed by your financial advisor.

Microsoft's Huge Move

chart courtesy of www.stockcharts.com

These last two weeks saw Microsoft with about a 25% move to the upside. After testing support around $40 this stock rebounded strongly to over $49. It now is testing resistance at just under $50. If it moves beyond this resistance point we will see a new upward sloping trend. Based upon the chart technicals it appears this stock has room to move.

This keeps with the fundamental idea that the US stock market is the place where the large money wants to go. Many of the Dow Stocks and large cap stocks are paying dividends well above 2% and are more stable than most banks. Don't listen to the doomsayers who say this market is overvalued. For now the large money has nowhere else to go.

Disclaimer: The above is for information purposes only. Any decision to buy, sell, or hold a specific investment should be reviewed with your personal investment advisor.