Stocks Look to Go Higher, But Will Face Resistance

The first quarter is completed. For stocks, it was positive in spite of several bouts of volatility. The small-cap Russell 2000 finished the quarter tops, advancing over seven percent. Technology has also been showing some attraction in the recent weeks.

Now, as we move into the second quarter, the month of April has been the best performing month for the DOW, averaging two percent since 1950, according to the Stock Trader’s Almanac. A major reason for the buying in April is the positive anticipation of first-quarter earnings.

And whether it is penny stocks, micro-cap stocks, or S&P 500 companies, you have to be impressed by the sustainability of the positive sentiment. The real test now comes as stocks edge higher. We need to see a strong break higher or we risk a relapse.

The major stock indices have closed higher in eight of the last 10 sessions to Wednesday, but there is a red flag, as the associated trading volume continues to be light, which fails to help confirm a strong buy signal. Unless we see increased volume on the up days, you have to question the lack of mass market participation in the current rally.

The near-term signals have a positive bias, but you need to watch the overbought condition.

The sentiment in the market is bullish, as stocks continue on a nice two-year rally from the March-2009 low. The trend of the NYSE new-high/new-low (NHNL) has been edging higher, with 172 of the last 182 sessions bullish as of March 30. In the technology area, 128 of the last 140 sessions have been bullish. All the signs point to additional gains ahead.

As of March 30, about 81.33% of all U.S. stocks are above the 200-day moving average (MA), down slightly from 82.38% a month ago. For the shorter-term MAs, the monthly decline has been more significant. For instance, about 59.87% of U.S. stocks are above their 50-day MA, down from 69.76% a month ago. We could be seeing a pending market decline.

So, while the momentum points to additional gains, I feel somewhat nervous that there hasn’t yet been a correction of any significant magnitude, albeit there have been several down days of over one percent over the recent month. This is not to say stocks are overvalued, but I feel they are fairly valued based on the current economic and earnings metrics.

And, unless there are fresh data that support additional gains, stocks could trade sideways in a tight channel in the upcoming months.

With the two-year bull market, investors and traders are looking for a reason to sell and take some profits. At the same time, there is also a feeling of not wanting to miss out on more potential upside opportunities. Option traders could use call options to play potential gains, while taking some profits on current stock positions. In this way, you can manage the risk.

I also believe in adopting strong risk management to protect your investments and hard-earned capital. Take some profits and use put options to hedge against a downside move.

George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.

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Stocks Look to Go Higher, But Will Face Resistance

The first quarter is completed. For stocks, it was positive in spite of several bouts of volatility. The small-cap Russell 2000 finished the quarter tops, advancing over seven percent. Technology has also been showing some attraction in the recent weeks.

Now, as we move into the second quarter, the month of April has been the best performing month for the DOW, averaging two percent since 1950, according to the Stock Trader’s Almanac. A major reason for the buying in April is the positive anticipation of first-quarter earnings.

And whether it is penny stocks, micro-cap stocks, or S&P 500 companies, you have to be impressed by the sustainability of the positive sentiment. The real test now comes as stocks edge higher. We need to see a strong break higher or we risk a relapse.

The major stock indices have closed higher in eight of the last 10 sessions to Wednesday, but there is a red flag, as the associated trading volume continues to be light, which fails to help confirm a strong buy signal. Unless we see increased volume on the up days, you have to question the lack of mass market participation in the current rally.

The near-term signals have a positive bias, but you need to watch the overbought condition.

The sentiment in the market is bullish, as stocks continue on a nice two-year rally from the March-2009 low. The trend of the NYSE new-high/new-low (NHNL) has been edging higher, with 172 of the last 182 sessions bullish as of March 30. In the technology area, 128 of the last 140 sessions have been bullish. All the signs point to additional gains ahead.

As of March 30, about 81.33% of all U.S. stocks are above the 200-day moving average (MA), down slightly from 82.38% a month ago. For the shorter-term MAs, the monthly decline has been more significant. For instance, about 59.87% of U.S. stocks are above their 50-day MA, down from 69.76% a month ago. We could be seeing a pending market decline.

So, while the momentum points to additional gains, I feel somewhat nervous that there hasn’t yet been a correction of any significant magnitude, albeit there have been several down days of over one percent over the recent month. This is not to say stocks are overvalued, but I feel they are fairly valued based on the current economic and earnings metrics.

And, unless there are fresh data that support additional gains, stocks could trade sideways in a tight channel in the upcoming months.

With the two-year bull market, investors and traders are looking for a reason to sell and take some profits. At the same time, there is also a feeling of not wanting to miss out on more potential upside opportunities. Option traders could use call options to play potential gains, while taking some profits on current stock positions. In this way, you can manage the risk.

I also believe in adopting strong risk management to protect your investments and hard-earned capital. Take some profits and use put options to hedge against a downside move.

George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.

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Possible End to QE2 Pushes the US Dollar Higher

03/28/11 St. Louis, Missouri – Good Day… Mike did a great job last week, didn’t he? I read over all of the Pfennigs yesterday to try and get caught up on things, and it sure sounded like an exciting week. A cooling of the reactors at the damaged nuclear plant in Japan and NATO military success in Libya have calmed the markets, and currency traders have begun to move back into the “risk” trades. This will be positive for the high-yielding commodity-based currencies, and should be negative for those currencies that were purchased as “safe havens.”

St. Louis Federal Reserve President James Bullard dominated this weekend’s news with a suggestion that the Fed should consider exiting QE2 prior to spending the full $600 billion that was approved for the purchase of US Treasury securities. Apparently Bullard feels that the 3% GDP reported for the fourth quarter on Friday is strong enough to prompt an early exit from round two of the quantitative easing program. “The economy is looking pretty good,” Bullard said to reporters in France on Saturday. “It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the program or to stop a little bit short,” he said. QE2 is scheduled to continue through June, and many (including myself) still think there is a good chance we see a third round of easing before the end of the year. Chairman Bernanke has not shown any desire to end the program early, and continues to be worried about the “jobless” recovery here in the US.

But the dollar bulls liked what they heard from Bullard, and the dollar is up slightly in European trading. The reason for the dollar strength goes back to supply and demand. The Fed has been pumping dollars into the markets with their purchase of US Treasuries. So the currency markets have already priced in the additional $600 billion of supply, but if the Fed stops the program before placing all of these funds into the markets, there would be less US currency flooding the markets and therefore the value of each dollar should rise. An early exit by the Fed from the bond purchases would also move rates higher, decreasing the interest rate differential, which has been widening recently. The dollar also got some help from predictions that this morning’s Personal Spending data will show that US consumers are increasing their purchases. Personal spending is expected to have increased 0.5% in February, and Personal income is expected to have increased slightly less at 0.4%. We will also see pending home sales numbers for February, which will probably be disappointing.

The rest of the week will be pretty slow as far as economic data is concerned, with just the consumer confidence and CaseShiller home price index tomorrow and Challenger jobs data on Wednesday. Thursday will bring our usual weekly jobs numbers along with Factory orders for February. Friday will be the big data day, with the release of the employment data for March along with the ISM Manufacturing and Vehicle sales numbers. With no real data released until Friday here in the US, markets will continue to look for direction from Europe and the Middle East.

The euro (EUR) is trading off a bit in early trading after German Chancellor Angela Merkel’s Christian Democrats were defeated in a regional election. Merkel has been a strong force in the EU’s navigation through the treacherous waters of the sovereign debt crisis, and any indication that she could be losing her grip on power in Germany is bad news for the euro. Mike wrote about Portugal’s problems last week, and the ratings agencies are “piling on” as usual. S&P followed Fitch in cutting Portugal’s credit rating late last week and warned that further downgrades are possible as early as this week. Portugal’s President still hasn’t asked for help from the EU, and is convinced he will be able to get the country’s three biggest political parties to agree on budget cuts in order to meet the government’s deficit targets. The Portuguese government has set a target for a budget deficit of 4.6% of GDP in 2011 and aims to reach the EU limit of 3% in 2012. As Mike pointed out, Portugal is just a small piece of the European picture, but it shows that this sovereign debt problem has some real legs, and will continue to cast a shadow on the euro.

We will get a clear picture of how the markets feel about the EU debt crisis this week, as Italy plans to sell 21.5 billion euros of debt. Italy is Europe’s most indebted country in nominal terms with 1.8 trillion euros of debt. But Italy didn’t have a housing and borrowing fueled boom, so the Italian banks are in better shape than their competitors in Ireland and Greece. The debt auction is expected to go well, and should put a floor on any euro fallout from the Portugal downgrades.

The pound (GBP) continued to decline on Friday, and is off further in this morning’s European trading. The pound fell after a report showed that UK business confidence is the weakest in two years. As Mike reported last week, minutes from the last BOE meeting suggests that rates will remain low. Data to be released tomorrow may further weaken the pound, as it is expected to confirm that the UK economy shrank more than initially estimated in the fourth quarter. Government austerity measures and rising fuel prices are to blame for the negative confidence.

The commodity currencies of Canada (CAD), Australia (AUD), and New Zealand (NZD) were among the best performers over the weekend as investors felt more confidence in the global economic recovery. The Canadian dollar gained the most in three weeks versus the US dollar as crude oil held above $104 per barrel. But the loonie’s rally will probably be capped by political uncertainty, after Prime Minister Stephen Harper’s government was toppled by opposition lawmakers.

The commodity rally and a return to “risk” trades has helped push the Australian dollar to the highest level versus the US dollar since 1983. The Aussie dollar traded above $1.03 for the first time since it began trading freely, surpassing the previous record which it hit on Thursday of last week. The combination of rising commodity prices, and positive interest rate differentials has encouraged investors to flock back into the Aussie dollar.

Both the gold price and silver price are off their highs of last week, but are still trading at fairly strong levels. The precious metals declined on Friday on signs that the US economy is improving, decreasing the need to hold them as a hedge. Bullard’s talk of ending QE2 early eased inflationary concerns, pushing the metals lower. NATO success against Libyan military forces have also helped ease the “need” for the relative safety of the precious metals. Global events over the past few months confirm our belief that all investors should hold a diversified portfolio including metals and currencies. Diversification is an investor’s best protection against the unknown!

Recap: St. Louis Fed Head suggested the FOMC should look for an early exit to QE2, which pushed the dollar higher. Portugal had a ratings decrease, but the President is confident that he will be able to get his government to accept austerity measures. The euro will be tested by Italy’s bond auction this week, but is looking like it will hold up above $1.40. The pound sold off as UK business confidence is at the lowest point in two years. Commodity currencies continued to rally as “risk” trades were put back on, and gold and silver sold off their highs, but continue to protect investors.

Chris Gaffney
for The Daily Reckoning

Chris Gaffney is vice president of EverBank World Markets and the alternate author of the popular Daily Pfenning newsletter. Mr. Gaffney has been involved in the global marketplace since 1987, and is director of sales for EverBank World Markets. The Daily Pfennig is delivered via e-mail to tens of thousands of market watchers globally, providing commentary that allows them to stay on top of economic, currency, and market happenings. He is a Chartered Financial Analyst and holds degrees in accounting and finance from Washington University in St. Louis.

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Radiation At Fukushima Water Jumps To Over 1 Sievert, 10 Million Times Higher Than "Normal", Plutonium Tests Ordered For The First Time

And the hits just keep on coming. Earlier today, TEPCO announced that the radiation in the water pool of reactor #2 had been measured at 1,000 millisieverts/h (1 sievert/h) - the highest reading so far recorded since the Fukushima disaster started. As a reminder, the U.S. Environmental Protection Agency says a single dose of 1,000 millisieverts is enough to cause haemorrhaging, which a ten hour exposure to this dose is enough to result in death. "The situation is serious. They have to pump away this water on the floor, get rid of it to lower the radiation," said Robert Finck, radiation protection specialist at the Swedish Radiation Safety Authority, speaking before the operator expressed doubt about the high reading. "It's virtually impossible to work, you can only be there for a few minutes. It's impossible to say how long it will take before they can gradually take control." From Kyodo: "Plant operator Tokyo Electric Power Co. said the concentration of radioactive substances of the puddle was 10 million times higher than that seen usually in water in a reactor core, but later decided to reanalyze the data because it found some errors." And keep in mind this is the idiocy that is resulting after last week the brilliant geniuses at TECPO came up with the plan to water each and every reactor: now it's time to remove the water, but the water just happens to be so radioactive, nobody can remove it. In the meantime the leak into the ocean keeps getting worse: "Radioactive iodine-131 at a concentration 1,850.5 times the legal limit was detected in a seawater sample taken around 330 meters south of the plant, near a drainage outlet of the four troubled reactors, compared with 1,250.8 times the limit found Friday, the agency said." And while Zero Hedge has long believed that the only possible outcome here is the Plan Z concrete entombment, which will guarantee an 80 km non-inhabitable radius around Fukushima in perpetuity, finally the "experts" are warming up to this idea: per Reuters: "Experts say there is still too much heat in the reactor cores and spent fuel at the Fukushima plant for a similar last-ditch solution to be considered yet."

LEVELS 10 MILLION TIMES ABOVE NORMAL

The latest scare came as engineers were trying to pump radioactive water out of a turbine unit after it was found in buildings housing three of the reactors.

Officials at first said the water in No. 2 was found to contain 10 million times the amount of radioactive iodine that is normal in the reactor, but noted the substance had a half-life of under an hour, meaning it would disappear within a day.

Later they said the element that gave the reading may have been cobalt 56, which has a half life of 77 days, and if this was the case the level of radioactivity would have been far lower.

Radiation levels in the sea off the plant rose on Sunday to 1,850 times normal, from 1,250 on Saturday, Japan's Nuclear and Industrial Safety Agency said.

"Ocean currents will disperse radiation particles and so it will be very diluted by the time it gets consumed by fish and seaweed," said Hidehiko Nishiyama, a senior agency official.

TOKYO RADIATION LEVELS NORMAL

The elevated radiation detected on Sunday was confined to the reactor, and radioactivity in the air beyond the evacuation zone around the plant remained in normal ranges.

In downtown Tokyo, a Reuters reading on Sunday afternoon showed ambient radiation of 0.16 microsieverts per hour, below the global average of naturally occurring background radiation of 0.17-0.39 microsieverts per hour.

Several countries have banned produce and milk from Japan's nuclear crisis zone and are monitoring Japanese seafood because of fears of radioactive contamination.

Kyodo news agency said Japan would call on World Trade Organisation members at a meeting this week not to overreact to the radiation scare and abide by rules that ban import restrictions not based on scientific grounds.

The accident has also triggered concern around the globe about the safety of nuclear power generation. U.N. Secretary-General Ban Ki-moon said it was time to reassess the international atomic safety regime.

The crisis looked set to claim its first, and unlikely, political casualty. In Germany, Chancellor Angela Merkel's party faced defeat in a key state on Sunday, largely because of her U-turn on nuclear power.

OVERSHADOWING RELIEF EFFORT

The drama at the plant has overshadowed a relief and recovery effort from the magnitude 9.0 quake and the huge tsunami it triggered that left more than 27,100 people dead or missing in northeast Japan.

In Otsu, 70 km (42 miles) south of the stricken nuclear facility, the townsfolk are faced with livelihoods derailed by the natural disaster and now the fear of radiation in the air.

Ninety-three-year-old Kou Murata sat cross-legged on the floor of a school classroom, her home for the past fortnight. Surrounded by piles of quilts and blankets, she fretted over what was to become of her in the twilight of her life.

"I am afraid because people are leaving, and we are alone," she said, looking small and frail in a jacket decorated with snowmen.

Murata's daughter, Hisae, said the government had not helped them.

"I want to go back home, but the situation is impossible," she said. "I applied to the government to get a temporary house, but we need a certificate to say the house was destroyed. Now all the temporary houses have been taken. We thought the government would come to us, but we need to go to them."

The first opinion poll to be taken since the disaster showed the approval rating for Prime Minister Naoto Kan had edged higher, to 28.3 percent, but more than half disapproved of how the nuclear crisis had been handled.

Making things much worse is that, apparently for the first time, TEPCO has ordered tests for highly toxic and extremely lethal plutonium on the site:

As the worst atomic accident since Chernobyl entered its third week, the government said soil near the Fukushima plant would be tested for plutonium contamination. The radioactive metal was used in one of the reactors and its presence outside the plant would suggest the fuel rods were damaged.

 “I’ve said the situation won’t immediately improve, and high radiation water is one of the unexpected things that I had said might occur,” Chief Cabinet Secretary Yukio Edano said at a briefing in Tokyo today. “We want to continue cooling, and establish a direction toward ending the situation.”

Soil samples have been taken and will be tested for plutonium, Edano told reporters.

Radiation leaks have contaminated vegetables in regions around the plant and sparked scares over tap water in Tokyo, 227 kilometers (140 miles) southwest of the Tokyo Electric Power Co. Dai-Ichi power station.

Which of course means that up until now nobody had been measuring for plutonium fall out. Brilliant.

And while nobody really knows anything that is happening at the plant, one thing we can be sure of is that the latest surge in radiation by 10E6, will cause Joe LaVorgna to hike his GDP forecast for Japan by a comparable amount.

In other news, radiation burns suffered by three TEPCO workers while puddling along reactor 2 was just due to unfortunate combination of too much sun and little to no tanning lotion. We are confident repair on Reactor 2 will proceed immediately...by mutant 3 eyed ill-tempered seabass. Or was the seawater radioactivity count faulty too?

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Chart–Why the Market Is Going Higher, and Inflation Is Heating Up

Here’s a chart of the U.S. Monetary Base …

Any time you have more and more of something, the individual pieces of it are worth less and less.  That applies to the dollars in your wallet, too. 

Monetary policy is decided by the Federal Reserve.  Rage against Helicopter Ben Bernanke if you like.  But the latest version of Congress is refusing to spend money on stimulus we desperately need – trains, dams, bridges, education, job training and so on.  So, Ben gives us the only stimulus he can – creating more money. It’s a sideways approach to the problem, but when all you have is a hammer, every problem becomes a nail.

In every crisis there is opportunity, and sure enough, this flood of money is bullish for the positions I’m recommending to my subscribers in Red-Hot Global Resources and Crisis Profit Hunter.

But don’t kid yourself. This will likely end badly. Gold and silver and other hard assets, as well as select stocks and funds, can be your cushion against a hard landing.

Tagged as: Federal Reserve, U.S. monetary base

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