Market Commentary

Sterling Market Commentary for Thursday January 10th, 2013

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Sterling Market Commentary for Thursday January 10th, 2013

A Look at Wednesday’s Market:  The overall market moved moderately higher in a relatively broad based move that saw the majority of the sector indices I track move higher on the day as well.  In the commodities markets, Oil was lower by $0.05 to $93.10 per barrel, and Gold was lower by $6.70 to $1,665.50 per ounce.  In the grain markets,  Wheat was lower by $0.05 to $7.454 per bushel, and Corn was higher by $0.054 to $6.942 per bushel, while Soybeans were lower by $0.01 to $13.854 per bushel.  The price of oil caught by eye yesterday as it has quietly climbed from the mid $80 range to back well over $90 per barrel.  I have included a chart on the current oil futures contract below for your review.

Chart of Oil through Janauary 9th, 2013

Oil through January 9th, 2013

Last summer the price of oil briefly saw upward resistance at $94.74 per barrel, then retreated to lower prices before it resumed its move to just over $100 per barrel.  This is worth watching, because if closes above $94.37 in the next few days, then we could see a move back to $100 per barrel with significantly higher fuel prices to follow.

Additionally, and it should be carefully noted that the current futures contract set a closing high of $97.91 on September 17th, 2012.  If the price of oil closes above that level then it will have completed a cup pattern with a measured move to $110.31 per barrel. This puts in the price territory for dramatically increased risk of returning to the highs of 2008 for the price of oil.   For more of my thoughts on the price of oil at these levels,  please see the Sterling Weekly for February 27th, 2012. 

A Few Thoughts on Thursday’s Market:  I continue to have concerns about the short to intermediate term direction of the market. I think that there is an extremely high level of political risk to the market.  I truly believe that we are on the cusp of the greatest ideological battle of our lifetime over the direction of this country through the coming fight over spending levels.  President Obama has clearly stated that he does not believe that spending is a problem.  There is a growing belief that the Democrats in Washington, DC view the fight as a way to regain control of the House of Representatives in 2014; and they are preparing to do what ever it takes to win that fight, regardless of the consequences to the country.  If that it is the case, then the economy and the markets are in for a lot of pain.

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Market Commentary

Sterling Market Commentary for Thursday January 3rd, 2013

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Sterling Market Commentary for Thursday January 3rd, 2013

A Look at Wednesday’s Wednesday’s Market:  The overall market moved very sharply higher on Wednesday, the 1st trading day 2013.  While the sharp move higher is being attributed to the “deal” on the Fiscal Cliff that was reached late Tuesday night; I would like to offer an alternative view as to what helped propel the market higher.  Granted the agreement on the Fiscal Cliff was a significant factor in yesterday’s move higher; and it shows you the perceived economic impact of keeping tax rates low.  However, I would like to point out that because yesterday was the 1st trading day of the new year, it was also the 1st day where investors could re-enter positions following tax related selling last year and establish their cost basis in2013.  I think a lot of money came out of the market in late 2012 and had been sitting on the sidelines waiting for the start of 2013; and yesterday we saw the results of that money going back to work.  I would also like to point out that the major market indices are basically back at the levels they were when the sell off started in early October.   Something to think about if you doubt the validity of my tax related selling theory.

A Few Thoughts on Thursday’s Market:  In looking at the charts from yesterday’s trading activity, it looks as if the majority of the indices I track are over extended to the upside.  As a result, I would not be surprised to see the market basically track sideways with a slight downward bias over the next several trading days.  It is important to keep in mind that there remain a lot of unresolved issues in Washington D.C., and about the only good thing I can find in the “deal” that supposedly resolved the Fiscal Cliff is the preservation of income tax rates for the majority of Americans.  Otherwise as near as I can tell, it was a horrendous deal. for the country.  Other than the upcoming debt ceiling issue, I do not see any incentive or desire for Democrats, Liberals, and Progressives to engage in any form of meaningful reform or attempts to deal with the problems facing this country  and our economy.

I would like to comment on an excellent article in today’s Wall Street Journal by Martin Feldstein titled “The Fed’s Dangerous Direction.”  Mr. Feldstein discusses the problems with the Fed’s Quantitative Easing programs and asset buying strategies.  He spends a fair amount of time discussing the problems the Fed is likely to face when it stops its asset purchase program and the consequences to the U.S. economy and tax payers.  I urge everyone to read this article. As I have been saying for a long time, he also states that when the Fed stops its asset purchase program we are likely to see a dramatic rise in interest rates and a corresponding drop in asset prices.  He further discusses the prospects of high inflation taking hold and the difficulties that the Fed will have in combating inflation.  He also talks about how the activities of the Fed are covering up the inept and failing policies coming from Congress and the President.  It is worth reading, and if you have time I suggest taking a look at it.

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Market Commentary

Sterling Market Commentary for Wednesday January 2nd, 2013

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Sterling Market Commentary for Wednesday January 2nd, 2013

A Few Thoughts on Today’s Market:  Well, I will confess to having taken most of December off and letting the political mess in Washington D.C. play out.  It turned out to be a good opportunity to spend some time with family and for us to enjoy our 4 month old baby boy.  The situation in Washington DC continues to make a mess of the markets with computer programs that spit out trading strategies based upon headlines written by a news industry primarily staffed by a young, underpaid and an over worked staff.  These programs lack the capacity to read through the details of the articles with any form of understanding of what they are reading.  They simply count key words that they assign ratings to in an attempt to determine the level of positiveness or negativeness to the news.  Worse yet, the programs can be played by politicians or other parties with an agenda by gaming the “key” words used in speeches and articles.  Take a moment and imagine how different public opinion and the reaction of these computer programs would be if a few key writers, who majored in English and not anything close to finance or business that would provide a real understanding of taxes and economics,  had changed their opinion of the recent deal to avert the tax increases of the Fiscal Cliff.  If a couple of key writers, at the right major media outlets had written that this was a rotten deal,  then the market could easily be on its way significantly lower instead of sharply higher.

Here is the other problem I have with these computer driven trading programs;  they are not long term investors.  As near as I can determine, they are nothing more than short term speculators who move in and out of investments at lightening fast speeds and have a strong bias towards not holding positions overnight as they seek to maximize their ability to switch strategies in the shortest amount of time possible with the least amount of risk.  So this leads me to my biggest concern about the activities of these computer driven trading strategies;  I think they basically push the market artificially higher (or lower) than it would normally be; and when the time for a correction comes, the correction is far sharper and painful than it would otherwise be.  This puts smaller investors at risk of unnecessary losses.  While I do not have a good solution to what I perceive to be the problems created by all these computer driven trading programs, I do think that everyone should be aware of the risk they poise to the market and not be lured into a false sense of optimism when things could easily be a lot shakier than people realize.

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Market Commentary

Sterling Market Commentary for Thursday December 13th, 2012

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Sterling Market Commentary for Thursday December 13th, 2012

A Look at Wednesday’s Market:  The overall market was essentially mixed yesterday with the major market indices moving slightly lower, while the sectors that were commodity sensitive moved higher, and bonds moved lower.  In the commodities markets, Oil was higher by $0.98 to $86.77 per barrel, and Gold was higher by $8.30 to $1,717.90 per ounce.  In the grain markets,  Wheat was lower by $0.094 to $8.120 per bushel, while Corn was lower by $0.024 to $7.254 per bushel, and Soybeans were higher by $0.014 to $14.734 per bushel.

A Few Thoughts on Thursday’s Market:  Currently it looks like the overall trend of the market is higher and being fueled by the Fed’s unlimited bond buying program.  As I have stated many times, I believe the Fed’s Quantitative Easing Programs primarily benefit the large multinational corporations and big banks, but leaves the main street and everyday business man standing on the sidelines.  I believe that in the process it is creating a bond bubble that when it eventually bursts, as all bubbles do, the consequences will be far more severe than the bursting of the housing bubble.  For a better look at my thoughts on this issue,  please see the March 5th, 2012 edition of the Sterling Weekly.

Additionally, we still have the unresolved issue of the fiscal cliff looming over the market.  At the end of the day, I just do not get the blind faith that a deal will be magically reached to avert the negative effects of the fiscal cliff.  There is a lot of risk, that I am not comfortable with at these levels.

The Dow Jones Industrial Average: The Dow Jones Industrial Average closed at 13,245.45   I think the Dow Jones Industrial Average is at an inflection point.  It has closed the last 2 trading sessions within 2 points of the upper end of our expected retracement range of the recent downward movement.   Current Expectations:  I think the next couple of trading sessions will clarify whether the Dow is going to move higher and test the October highs or turn back lower and test the November lows.

Dow Jones Transportation Average:  The Dow Jones Transportation Average closed at 5,174.74  I continue to see upside resistance on the the Dow Transportation Average at 5,215.97 and downside support at 4,873.76  and then at 4,795.28.  Current Expectations:  I think the Dow Transports are going to track sideways between support and resistance for the foreseeable future.

S&P 500 ‘SPX’:  The S&P 500 closed yesterday at 1,428.48  I currently see upside resistance on the S&P 500 at 1,457.34 and downside support on the S&P 500 at 1,405.82  Current Expectations:  The current trend of the S&P 500 is to the upside, however I have concerns that the current move higher is in the process of running out of steam.

NASDAQ 100 Index ‘NDX’:  The NDX closed yesterday at 2,674.57  I see upside resistance on the NDX currently at 2,741.34 and downside support at 2,524.36 on a closing basis.  Current Expectations:  I think the NDX is going to continue to move lower and test 2,524.36 and then 2,458.83 on a closing basis.

The Bottom Line:  I think the market will continue to move lower for the next few trading sessions.

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Weekly Newsletter

Sterling Weekly for the Week of December 12th, 2012

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Sterling Weekly for the Week of December 12th, 2012

A Look at the Possibility of Year End Tax Planning to Explain Recent Market Moves

Since the previous edition of the Sterling Weekly, the Dow Jones Industrial Average declined 188.69 points or approximately 1.4% to Tuesday December 11th’s  closing level of 13,248.44.  Since then the move has been anything but a straight line.  On October 5th, the Dow Jones Industrial Average reached a closing high of 13,610.15 and then declined to a low of 12,542.38 before rallying back to its current levels.  In the Sterling Market Commentary for Friday November 23rd I discussed my thoughts on a possible retracement back to higher levels of the recent market sell off before it would be resume its downward path.  However, yesterday’s closing level of 13,248.44 was within 2 points of the upper end of my expected retracement range of 13,247.11  So unless the market suddenly turns back lower, I think there is a good chance that we will see the market test its October highs.  In looking at the market and attempting to determine where it goes from here, it is important to try to understand what has happened since early October.   I have inserted a chart on the Dow Jones Industrial Average below for your review.

Dow Jones Industrial Average through December 11th, 2012

Dow Jones Industrial Average through December 11th, 2012

In looking at the market activity since October 5th, I start wonder if what we are looking at is a the effects of a trading strategy designed to avoid the “wash sale” tax rules, and to lock in capital gains at the lower tax rate prior to the Fiscal Cliff on December 31st, 2012?  It is an interesting question.  A “wash sale” is the sale of a security (stock, bond or options) at a loss and repurchasing the same or substantially identical stock shortly before or after.  The idea is to make an unrealized loss claimable as a tax deduction, by offsetting against other capital gains or future tax years.  The stock is then repurchased in hopes of it recovering in value.  The United States disallows wash sales for tax deductions if the wash sale occurs within a 30 day time period.  However, if there is more than 30 days between the time of the sale, and the date of the repurchase, then the deduction of the loss for tax purposes is allowed.

So this is how it see this having worked in the current situation.  Investors and traders begin selling stocks 30 days before the November 6th election.  This way if President Obama wins they can buy back in and square up their portfolios before the end of the year; and in the process they will have locked in the losses and the lower tax rate on their capital gains. The advantage is that you get to reset your cost basis on your gains and reduce your tax bill in the process.  At the same time the losses reduce the amount of the final check sent to the Internal Revenue Service (IRS).  If Mitt Romney would have won the election there was still no guarantee he could avoid all the tax increases of the Fiscal Cliff or those scheduled to take place due to Obamacare.  Waiting until after the election to implement this trading strategy would not have made sense as it would have left very little time to square up the portfolios.

If I am correct, and this is what did occur, then I expect the market to continue to move higher and test the highs set in early October.  My estimate is that this situation will clarify itself within the next few trading days.

Sterling Calendars for the Week of December 10th, 2012

Date

Est. Time

Releases

For

Consensus

Prior
12/11 8:30am Trade Balance Oct. ($42.8B) ($40.3B)
12/11 10:00am Wholesale Inventories Oct. 0.4% 1.1%
12/12 7:00am MBA Mortgage Index 12/08 N/A 4.5%
12/12 8:30am Export Prices – Ex Ag. Nov. N/A 0.2%
12/12 8:30am Import Prices – Ex Oil Nov. N/A 0.3%
12/12 10:30am Crude Inventories 12/08 N/A (2.357M)
12/12 12:30pm FOMC Rate Decision Dec. 0.25% 0.25%
12/12 2:00pm Treasury Budget Nov. ($113.0B) ($137.3B)
12/13 8:30am Initial Claims 12/08 375K 370K
12/13 8:30am Continuing Claims 12/01 3,200K 3,205K
12/13 8:30am Retail Sales Nov. 0.4% (0.3%)
12/13 8:30am Retail Sales Ex-Auto Nov. 0.0% 0.0%
12/13 8:30am Producer Price Index ‘PPI’ Nov. (0.5%) (0.2%)
12/13 8:30am Core Producer Price Index ‘PPI’ Nov. 0.1% (0.2%)
12/13 10:00am Business Inventories Oct. 0.4% 0.7%
12/14 8:30am Consumer Price Index ‘CPI’ Nov. 0.2% 0.1%
12/14 8:30am Core Consumer Price Index ‘CPI’ Nov. 0.1% 0.2%
12/14 9:15am Industrial Production Nov. 0.3% (0.4%)
12/14 9:15am Capacity Utilization Nov. 78.0% 77.8%

 

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Market Commentary

Sterling Market Commentary for Friday November 30th, 2012

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Sterling Market Commentary for Friday November 30th, 2012

A Look at Thursday’s Market:  The overall market moved moderately higher on Thursday in a broad based move that saw almost every sector I track move higher as well.  I am not sure what is really driving the market at this point in time as I do not see any evidence of a realist deal on the Fiscal Cliff issues any time soon.  I fact, I think the sides in Washington DC are further apart

A Few Thoughts on Friday’s Market:  After having the majority of the last several trading days being to the upside, I see a good chance that we could see the market lower today.

The Dow Jones Industrial Average: The Dow Jones Industrial Average closed at 13,021.82    I see upside resistance on the Dow Jones Industrial Average at 13,115.54 on a closing basis.  I now see downside support coming in at 12,715.93 on a closing basis.   Current Expectations:  I think we are starting a new trend lower in the Dow.  I am expecting the Dow Jones Industrial Average to continue to move lower and test 12,715.93 on a closing basis.

Dow Jones Transportation Average:  The Dow Jones Transportation Average closed at 5,145.35  I continue to see upside resistance on the the Dow Transportation Average at 5,215.97 and downside support at 4,873.76  and then at 4,795.28.  Current Expectations:  I think the Dow Transports are going to track sideways between support and resistance for the foreseeable future.

S&P 500 ‘SPX’:  The S&P 500 closed yesterday at 1,415.95  I currently see upside resistance on the S&P 500 at 1,419.04 and downside support on the S&P 500 at 1,359.88 and then at 1,343.36  Current Expectations:  I think the S&P 500 is going to move lower and test 1,359.88 and then 1,343.36 on a closing basis.

NASDAQ 100 Index ‘NDX’:  The NDX closed yesterday at 2,680.03  I see upside resistance on the NDX currently at 2,741.34 and downside support at 2,524.36 on a closing basis.  Current Expectations:  I think the NDX is going to continue to move lower and test 2,524.36 and then 2,458.83 on a closing basis.

The Bottom Line:  I think the market will continue to move lower for the next few trading sessions.

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