Wall Street Sector Selector

At the Tipping Point (Again)

John Nyaradi — Sun, 25 Jul 2010 17:38:00 GMT

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Volatility was the name of the game last week as the bulls struggled back and nearly managed to push the S&P 500 above the all important 200 Day Moving Average. As I mentioned during the mid-week updates this struggle will resolve itself one way or other in the coming days as the markets battle between negative macro indicators and positive earnings news.

If the 200 Day Moving Average can be breached and held on the positive side, one could see another strong up leg ahead. If this attempt fails, then lower prices or the current trading range will very likely continue.

Today we switch to “Yellow Flag Flying,” expecting choppy prices ahead.

Looking at My Screens

The indicators remain mixed with the Dow and Russell 2000 and NASDAQ 100 now above their respective 200 Day Moving Averages and the S&P 500, our major market barometer, below its 200 day average but having successfully breached the psychologically important 1100 level and a solid close above its 50 Day Moving Average.

We remain overbought on a short and medium term basis which is bearish while sentiment remains relatively neutral with not much conviction on either side of the trade.

The View from 35,000 Feet

Macro economic news was poor this week with new unemployment claims unexpectedly rising from 464,000 to 472,000 and the ECRI (Economic Cycle Research Institute) annualized indicator dropping to -10.5 from -9.8 and breaching the all important -10 level which has been an accurate forecaster of recession for more than 40 years. This week’s reading was its lowest since last May as the current recovery was getting under way.

The big news items were Dr. Bernanke’s testimony to Congress in which he said the recovery was ongoing but that we are in uncertain times and that the Fed stood ready to assist the recovery with more “quantitative easing” if conditions required. Stocks plunged hard on his first day of testimony and rallied hard on the second, reflecting the confusing nature of today’s markets.

Good earnings from Caterpillar and UPS helped the market higher and on Friday the results of the European banks “stress tests” were made public with just 7 out of 91 “failing” the tests.

Over the weekend I’ve been reading almost unanimous opinion that the stress tests weren’t stressful and this was reflected in the Euro dropping after their announcement. The major complaint was that the tests ignored most of the banks’ sovereign debt holdings which would be similar to ranking your credit score without including your home mortgage, and so there’s speculation in both the mainstream financial press and “blogosphere” that markets won’t “buy” the outcome of the tests on Monday when they reopen. We’ll have to wait and see how that goes.

But Europe clearly has ongoing problems as Moody’s placed Hungary on review for a possible downgrade and the European LIBOR is at recent highs, indicating stress in the credit markets.

Furthermore, as we discussed last week, bond prices remain priced for Armageddon as the 2 Year Treasury yield remains at lows as the bond market ignores the current rally in equities.

What It All Means

The tug of war continues and we will be ready to respond in either direction. A very compelling argument can be made for a rally or a selloff based on both fundamental and technical indicators. If the 200 day moving average is broken to the upside, there likely will be a massive short covering rally and if the index fails to break higher, then the major indexes are superbly positioned for a significant slump on the order of 8-10% or approximately S&P 900-950.

The tone will be set when trading begins in Asia and Europe and we get the first hint of the response to the European banks’ stress test. With the Euro falling on Friday and the 3 month Eurobor at highs for the year, the early response to the results was negative and if this if followed through in the equity markets, lower prices would likely be ahead.

Highest probability for the coming days would be a decline within the trading range we have been in as macro indicators could likely continue their negative streak, earnings remain positive, market participants remain suspicious of the true health of the European banks and technical indicators trump for the short term ahead.

The Week Ahead

It will be another exciting week with major economic reports and ongoing earnings reports, although with fewer bell weather companies reporting than last week.

Economic Reports:

Monday: June New Home Sales

Tuesday: May Case/Shiller Home Price Index, July Consumer Confidence

Wednesday: June Durable Goods, July Fed Beige Books

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims

Friday: Q2 GDP Revision, July Chicago Purchasing Managers Index, July Final University of Michigan Consumer Sentiment.

Earnings:

Tuesday: BP, DuPont, US Steel

Wednesday: Boeing, General Dynamics

Thursday: Exxon

Sector Spotlight:

Leaders: Copper, Brazil, Homebuilders

Laggards: Bonds, Japanese Yen, VIX

All the best, To get a Complimentary Special Report from Wall Street Sector Selector, click here:

John

Wall Street Sector Selector

All information presented herein is for general information only and deemed to be from reliable sources, but we cannot guarantee its accuracy. Readers are strongly advised to check with their investment counselors before making any investment. There is risk of loss in all investment activity.

Disclosure: PSQ, SH, RWM, SKF, SPY Put Option

Plan on 850 0n the S&P 500

John Nyaradi — Sun, 18 Jul 2010 20:23:00 GMT

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I never make predictions because no one can foretell the future and no one has a crystal ball. However, after last week’s market action and economic developments and looking at both technical and fundamental indicators, I believe that S&P 850 is a reasonable probability in the weeks and months ahead.

The fun could start as early as Monday, July 19th, as the International Monetary Fund made a surprise move on Saturday and walked away from talks with Hungary regarding the IMF 20 Billion emergency loan that the IMF has been offering that country. A shade of Greece contagion is very likely to rattle not only Hungarian assets but possibly global markets, as well, as Hungary will not have access to this loan without further commitment to cut their deficits which are 80% of GDP.

Beyond this surprise news, last week’s news was mostly dismal, at best, and so let’s take a closer look at why S&P 850 might be a reasonable destination as well as factors that might be in play to change our current course.

Looking at My Screens

Two of our three portfolios are currently profitable for the year while the S&P is now down -4.6% Year to Date. Overall, the downtrend remains in place and we remain in the “Red Flag Flying” mode, expecting lower prices ahead. However, this manic market has proven again and again its ability to turn on a dime and so we will maintain a dynamic posture in response to events as they develop.

Last Friday’s decline took us from much overbought to much oversold and so based on mean reversion philosophy, we could see a short term bounce. Furthermore, short term technical sentiment indicators reflect moderate pessimism which would also support the thesis for a rally. However, these short term conditions will very likely be offset by a very impressive line up of negatives that would support the “risk off” scenario.

Here’s a summary of negatives for the market going forward:

Negative Technical Indicators:

S&P 500 below its 200 Day Moving Average

S&P 500 below its 50 Day Moving Average

Only 40% of all NYSE stocks on a “buy” signal

Less than 40% of NYSE stocks above their 200 Day Moving Average

Less than 33% of NYSE stocks above their 50 Day Moving Average

S&P 500 on a Point and Figure “sell” signal

Negative Fundamental Indicators:

Empire State Manufacturing Index dropped to 5 from 20

Philly Fed dropped from 8 to 5.1

ECRI weekly index dropped to -9.8

University of Michigan Consumer Confidence dropped to 66.5 from 76.

The View from 35,000 Feet

Storm clouds gather on all fronts.

The ECRI, Economic Research Cycle Institute weekly index fell from -9.1 to -9.8 last week and now stands just 0.2% from the all important reading of -10. Without fail over the last 40 years, a -10 reading has accurately forecast an impending recession and it appears that all important benchmark could be breached next week.

The decline in the Philly Fed and Empire State Manufacturing Indexes points to an ongoing and abrupt slowdown in manufacturing which has been one of the really bright spots in the nascent recovery and indicates the possibility of slower growth ahead.

The ongoing credit contraction continues and is now in its fifteenth straight month and the largest in more than 60 years. Of course declining credit eventually results in slower business activity and that was reflected in this week’s -0.5% decline in retail sales.

Furthermore, the decline in the Michigan Consumer Confidence Index was truly startling as declines of 9 points like this are very rare and usually tied to cataclysmic events, which of course we didn’t see last week. Previous declines of this magnitude were associated with events like the collapse of Lehman Brothers, Hurricane Katrina and the New York attacks of 9/11. Only once has a decline of this magnitude occurred without a coincident major event and that was in 1980 at the beginning of the 1980-1982 recession; therefore it’s quite likely that consumers are hunkering down for tougher times ahead.

Bond prices are now priced for Armageddon as the 2 Year Treasury yield is at record low levels, below even those seen in late 2008 at the bottom of the financial meltdown that began with the collapse of Lehman Brothers in October of that year.

The U.S. Senate continues boycotting the extension of long term unemployment benefits which means that some 2 million people have lost their benefits in recent weeks with more to come as each week passes which will result in lower spending levels by U.S. consumers and a further hit to GDP.

This week the results of the European banks’ “stress tests” will be made public and depending upon the outcome could be a positive or negative for global markets.

What It All Means

It’s easy to conclude from the fundamentals that the economy is rapidly slowing and in increasing danger of experiencing a double dip recession. As we’ve previously discussed, this slowdown was expected later in the year but now seems to be upon us as we move into the lazy, hazy, crazy days of summer.

Technically speaking, the S&P 500 was unable to successfully challenge either its 50 Day or 200 Day Moving Average this week and this would point to lower prices ahead. Many technicians say that bottoms tend to be found 20-25% below the 50 Day Moving Average which would put the downside target for the S&P 500 at 825-850.

I mentioned earlier that a couple of factors could offset further declines in stock prices and those are the possibility of a good earnings season and further action on the part of the Federal Reserve to jumpstart the lagging recovery.

This week more than 130 companies are set to report earnings and positive outlooks could help bolster stock prices.

Also, The Federal Reserve Open Market Committee minutes released this week point to new worries on the part of the Fed regarding deflation and downgrades in their forecasts for economic growth and improvement in unemployment. While they had previously been talking about withdrawing stimulus and tightening monetary policy, now they’re saying, they “would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably.”

In plain English, the FOMC is once again considering more “quantitative easing” and this, too, could lead to a short term rally in stock prices going forward.

The Week Ahead

This is another huge week for economic and earnings reports that will surely be market movers. Major economic reports will focus on the housing industry and employment while earnings will come hot and heavy from the banking, technology, consumer and manufacturing sectors.

Economic Reports:

Monday: July National Homebuilders Index

Tuesday: June Building Permits, June Housing Starts

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims

Earnings:

Monday: IBM, Haliburton, Delta Airlines

Tuesday: Goldman Sachs, Apple, Yahoo

Wednesday: Coca Cola, Morgan Stanley, US Bancorp, Wells Fargo, Starbucks

Thursday: Caterpillar, UPS, American Express, Microsoft

Friday: Ford, McDonalds

Sector Spotlight:

Leaders: VIX, Agriculture, Wireless/Broadband

Laggards: China, Silver, Banks

Wishing you a great weekend wherever you may be,

To get a Complimentary Special Report from Wall Street Sector Selector, click here:

John

Wall Street Sector Selector

Earnings Season Dead Ahead

John Nyaradi — Sat, 10 Jul 2010 23:36:00 GMT

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This week will kick off the all important Q2 earnings season and will very likely set the tone for the markets going forward over the intermediate term.

The manic tone of the major indexes continued this week as eight out of nine down days in a row has been followed by four straight up days in a row.

We have lots of major economic news as well as a slew of earnings reports coming up and so can expect more volatility but possibly also a resolution of near term direction.

Looking at My Screens

Major markets went from vastly oversold last Tuesday to vastly overbought by Friday and the S&P 500 now faces significant resistance at the 1080-1100. In the chart below you can see the overhead resistance marked by the red horizontal lines and also that the index is below its 50 and 200 Day Moving Averages which also will offer significant resistance ahead.

chart courtesy of http://www.stockcharts.com

So, for now, in spite of this week’s heady run up, we remain in bear market territory.

The View from 35,000 Feet

Economic news continued to be mostly poor last week as the ECRI, Economic Research Cycle Institute’s weekly index dropped to -8.3 from -7.6 the week before. As we’ve discussed, a reading of -10 has historically been a reliable precursor to recession.

Mortgage interest rates have fallen to record lows but in spite of this incentive, mortgage applications are down -40% from last month and at the lowest levels since 1997, indicating continued weakness in the all important housing market.

The Baltic Dry Index, a widely followed index of dry goods global shipping demand has fallen more than 50% since May and the price of lumber has declined by 35% since May and both of these indexes are widely viewed as forecasting economic slowdown ahead.

Most importantly, last week’s June ISM report fell to a four month low and May consumer Credit declined -$9.1 Billion, much more than expected, on top of a -$14.9 Billion decline the previous month which was a revised figure from a gain of +$1 Billion. These figures indicate a slowing of economic activity and an ongoing deleveraging on the part of the consumer.

What It All Means

Overall we see more evidence of a slowing economy and the upcoming earnings season will be pivotal, particularly the forward looking guidance offered by the corporations as they report.

The Week Ahead

It’s a busy week for economic reports and earnings. Particularly notable economic reports will be Retail Sales on Wednesday and a host of reports about industrial production and manufacturing on Thursday.

Alcoa starts earnings season Monday after the close and we’ll hear from tech heavyweights Intel and Google and the money center banks on Thursday and Friday.

Economic Reports:

Tuesday: June Treasury Budget

Wednesday: June Retail Sales, May Business Inventories, FOMC Meeting Minutes, China GDP

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims, June Producer Price Index, July Empire Manufacturing Index, June Industrial Production, July Philly Fed, June Capacity Utilization

Friday: July University of Michigan Sentiment

Earnings:

Monday: Alcoa, Novellus

Tuesday: Intel, Yum Brands

Thursday: JP Morgan/Chase, AMD, Google

Friday: Bank of America, Citigroup, GE

Sector Spotlight:

Leaders: Spain, Materials, Italy

Laggards: Commodities, Treasury Bonds

I’m in Honolulu this weekend where it’s always a nice day. Hospitality Advisors LLC, a local travel consultant, reports that hotel occupancy for May was at 65.4%, up from the record low of 62% in May, 2009, the lowest level since they began their survey in 1987. So while things seem to be off the bottom here, locals I talk with tell me they have a long way to go.

Wishing you a great weekend wherever you may be,

John

John Nyaradi To get a Complimentary Special Report from Wall Street Sector Selector, click here:

Publisher

Wall Street Sector Selector

Economic Data Storm Slams Global Stock Markets

John Nyaradi — Sun, 04 Jul 2010 16:04:00 GMT

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Last weekend we discussed the economic data storm coming up and concluded our report by saying, “This data storm will likely set the tone for the coming weeks and whether or not it will be “risk on” or “risk off.”

Well, the data storm turned out to be a hurricane and by Friday afternoon going into the long 4th of July weekend, it was definitely “risk off” for U.S. markets.

After Wednesday’s close, we went to “Red Flag Flying” mode, expecting lower prices ahead and our portfolios went to 100% cash on Thursday morning.

Looking at My Screens

All major indexes suffered severe technical damage this week as we found the markets declining for seven days in a row.

As always, the charts tell the story:

chart courtesy of http://www.stockcharts.com

In the chart above we see that the S&P 500 is now well below its 200 Day Moving Average and that the “death cross,” the 50 Day Moving Average crossing below the 200 Day Moving Average, has just occurred.

We can also see MACD on a “sell” signal at the bottom and RSI at oversold levels on the top display.

chart courtesy of http://www.stockcharts.com

In the Point and figure Chart of the S&P 500, we see that the chart broke a Triple Bottom, generating a “sell” signal and now rests just above the blue Bullish Support Line at approximately 1009. The Bullish Support line generally provides very strong levels of support and a break through here indicates the onset of a new bear market in Point and Figure Charting methodology.

chart courtesy of http://www.stockcharts.com

And finally we take a look at the S&P 500 12 month chart going back to 2000. You can see how this chart identifies long term trends and that the index has now dipped back below the long term average which is only the 3rd occurrence since 2000. You can also note that in the previous two instances, significant declines followed this crossover.

In summary, the “chartology” shows us a declining market environment in almost any time frame and methodology.

The View from 35,000 Feet

The economic news last week was mostly all bad. Here’s a quick review of the positives and negatives of last week’s data storm:

Positives:

Case/Shiller Home Price Index: Up

Personal Spending: Up

Negatives:

Personal Income: Down

Consumer Confidence: Down

Chicago PMI: Down

Continuing Unemployment Claims: Up

Initial Unemployment Claims: Up

Construction Spending: Down

ISM Index: Down

Pending Home Sales: Down

Non Farm Payrolls: Down

Factory Orders: Down

In addition to the economic reports above, the ECRI, Economic Cycle Research Institute Index continued to decline to a seven month low to -7.7 from -6.9 last week. Historically when this indicator reaches -10, a recession follows and this index continues its steady approach to that level.

One of the most startling pieces of news last week was the announcement that California will begin paying some 200,000 of its state employees minimum wage until their budget impasse is settled and that the Governor’s edict was upheld by the California 3rd District Court of Appeal.

State Controller John Chiang is fighting the order on various fronts so quite possibly it will never go into effect but let’s just think about this for a moment. Here we have our largest state, a state whose GDP is 3% of the world’s and if it were a nation would be Number 8, ahead of countries like Russia and Brazil, struggling with a $19 Billion deficit and its employees possibly earning minimum wage. We are truly now entering the world of economic science fiction.

What It All Means

We don’t have to be economists to figure out that the news was mostly bad and indicates a rapid and unexpected slowdown in the U.S. and global economy. I was expecting this to occur later in the year but it now obviously has arrived earlier than anyone expected and I think we’ll be seeing rapid adjustments to projected GDP and earnings outlooks by analysts and economists going forward.

In my view we’re looking at a slowdown at best and a double dip recession at worst. As we discussed last week, one thing that might hold up stock prices through the summer is a good earnings season that begins on July 12th and the other would be renewed action by the Fed to stimulate demand through more quantitative easing and asset purchases.

The Week Ahead

It’s a quiet week for economic reports and earnings.

Economic Reports:

Tuesday: June ISM Services

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims

Friday: May Wholesale Inventories

Earnings:

Wednesday: Family Dollar Store

Sector Spotlight:

Leaders: Copper, Base Metals

Laggards: Coal, Heating Oil

It’s hard to believe it’s the 4th of July already. Summer is flying by as it always does.

Wishing you a great weekend wherever you may be,

John

John Nyaradi To get a Complimentary Special Report from Wall Street Sector Selector, click here:

Publisher

Wall Street Sector Selector

Economic Data Storm Ahead

John Nyaradi — Sat, 26 Jun 2010 23:41:00 GMT

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This week was full of economic excitement and stress in the stock markets of the world but was nothing compared to what lies just ahead.

We’ll talk about the economic data storm coming this week in just a moment, but first I’d like to discuss the biggest potential news item of last week and that is that Fed Chairman Ben Bernanke appartently is rounding up support at the Fed for a renewed round of quantitative easing.

As reported on June 24th in the Telegraph.co.uk, a British newspaper and web site, Dr. Bernanke is considering expanding the Fed balance sheet from $2.4 Trillion to true nosebleed territory of $5 Trillion.

Dr. Bernanke looks at the same data we do every week and has come to the same conclusion; the economy is slowing and we’re at risk of a double dip recession and global deflation.

If new quantatative easing on the part of the Fed should actually take place, this would be a radical "game changer" indeed.

Looking at My Screens

This week’s mostly bad news pushed markets down sharply mostly all week until Friday when we had a short rally in response to the financial regulation bill finally getting off the table and the highest consumer sentiment readings in two years.

We remain in the "Green Flag Flying" mode, expecting higher prices ahead for the short term.

Probably like you, my brain and gut tell me that markets must decline in response to all the bad news swirling about, however, as technical traders, adhering to one's trading discipline is vital to long term success. Perhaps current days will be another example of "climbing a wall of worry," perhaps not. Our positions could change at any time but for now we remain committed to the long side of the market.

There has been much written this week in "the blogosphere" about a "head and shoulders top" forming, which could come to fruition, however, I tend to believe in the old quote that "what everyone knows isn't worth knowing."

The View from 35,000 Feet

Last week saw mostly poor economic news with existing home sales plummeting, along with new home sales, while the Fed kept rates unchanged and tuned down their language to reflect a slowing economy ahead.

Durable goods were down but better than expected, (up minus transportation) while initial and continuing unemployment claims showed slight improvement.

GDP was revised downward on Friday which was a dash of cold water on the recovery story while the University of Michigan Consumer Confidence gauge rose to its highest level in two years.

We also saw strong earnings from tech bellwethers Oracle and Research in Motion, and the market seemed to like the financial regulation bill rolled out on Friday.

The ECRI, Economic Cycle Research Institute continues flashing yellow lights with its annual rate dropping yet again to a 56 week low and signaling rough water and slowing economic activity ahead.

What It All Means

So it seems that everyone agrees that we have a slowing economy and the potential for a double dip recession within the next few months, possibly as early as fourth quarter.

The “X” factors for the markets are Chairman Bernanke and the Fed as we discussed earlier along with corporate earnings that start in earnest in mid-July and the economic data points due to be released this week.

The Week Ahead

The week will be a data storm as mentioned earlier.

The G20 is meeting amid protests in the street this weekend in Toronto and may have something to say about global events when they adjourn while a huge stream of economic reports will be coming at us all week.

As outlined below, we’ll have news on home prices, consumer confidence, construction, home and truck sales, and the all important Non Farm Payrolls report on Friday.

This data storm will likely set the tone for the coming weeks and whether or not it will be “risk on” or “risk off.”

Economic Reports:

Monday: May Personal Income, May Personal Spending

Tuesday: April Case/Shiller Home Price Index, June Consumer Confidence

Wednesday: June ADP Employment Change, June Chicago PMI

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims, May Construction Spending, June ISM Index, May Pending Home Sales, June Auto/Truck Sales

Friday: June Non Farm Payrolls, June Employment, June Factory Orders

Sector Spotlight:

Leaders: Copper, VIX, Japanese Yen

Laggards: Spain, France, Energy

Wishing you happy trading and a great weekend wherever you may be, To get a Complimentary Special Report from Wall Street Sector Selector, click here:

John

Wall Street Sector Selector

These Are the Times That Try Men's Souls

John Nyaradi — Tue, 22 Jun 2010 23:26:00 GMT

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After remaining vastly overbought for days, major indexes have finally unwound to more reasonable levels with today's decline. In fact, things went from overbought to oversold in just one day.

Economic news remains weak with today's data showing that previously owned home sales declined -2.2% in May which was unexpected and bad news for the all important housing market.

Adobe posted higher than expected profits after the close today, Tuesday, June 22, which bodes well for Thursday's updoming important earnings announcements from Research in Motion, Oracle and Palm in the vital tech sector.

Tomorrow is "Fed Day" as we await to hear from Dr. Bernanke and his colleagues and although no change in interest rates is expected, their comments will be minutely examined, as always, for hints of future action.

On a technical basis we're now primed for further gains and sentiment grew more bearish today which is also bullish for the markets going forward.

Our indicators remain in "buy" mode.

As Thomas Paine so aptly wrote in The Crisis on December 23, 1776, "These are the times that try men's souls."

Of course, we're not at war fighting for our freedom, although sometimes it might feel like we are doing just that.

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Wall Street Sector Selector

Green Flag Flying

John Nyaradi — Sat, 19 Jun 2010 19:01:00 GMT

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It was a quiet week of bad news mixed with higher prices, and through it all, we had an almost “stealth switch” to “Green Flag Flying” mode on Friday and so now expect higher prices ahead.

As I mentioned in an email to a subscriber, the old adage, “the market is never wrong, opinions are,” certainly holds true through this confusing time. Personally I feel very bearish about the long term outlook, even the medium term going into fall, but for now the indicators say we’re in an uptrend and we should be “long,” and so we are.

Looking at My Screens

Market internals continued to strengthen this week and all of our primary indicators have switched to “buy” signals.

All U.S. indicators point to growing strength and rising prices, and interestingly, many European indexes went to “buy” signals on Monday, as well, including Germany, Italy, France and even the European Financial Sector.

Sentiment remains bearish by historical averages which is bullish for markets.

How long this uptrend might last is anybody’s guess, but for now this nascent rally seems strong and could have significant upside ahead.

Our current positions look like this:

Standard Portfolio:

Position #1: +4.8%

Position #2: +3.2%

Position #3: +4.7%

Position #4: +4.2%

Position #5: Cash

2X Portfolio:

Position #1: +11.4%

Position #2: Cash

Option Master Portfolio:

Position #1: Cash

In the Standard Portfolio we were stopped out this week on our VXX position which was a downside hedge. The plan was to see an expected pullback and close that position for a profit. However, the pullback didn’t occur and so this position limited our upside in the Standard for the week and was returned to a Cash position.

The above positions were entered on 6/11/2008 and Year to date, our portfolios look like this:

Standard Portfolio: +8.9%

2X Portfolio: -12.2%

Option Master Portfolio: +57.8%

S&P 500 +0.1%

I have been offering the Option Master Portfolio free of charge to Standard and Pro Members and am developing pricing and a program to offer it to the entire membership within the next couple of weeks. I’ll keep you informed of these developments and when it will be available. This is a very exciting trading program and one that seems well suited to today’s fast moving markets.

The View from 35,000 Feet

This week’s news was mixed as prices continued to rise. On the upside all major indexes advanced with the NASDAQ gaining +3%, the S&P +2.4% and the Dow and S&P holding above the all important 200 Day Moving Average. Technically the markets look very strong while fundamentals were mixed.

On the upside, the Empire State Manufacturing report came in positive, although lower than expected, industrial production was up, leading economic indicators advanced, Greece was reported to be on track with its austerity programs and the Euro had its best week since September.

On the downside, housing starts and building permits were poor while initial jobless and continuing claims rose against expectations. The Philly Fed report collapsed and the all important ECRI report continued to decline and is approaching levels that typically warn of impending recession.

What It All Means

Technically we are in an uptrend and I would expect higher prices ahead. Fundamentally things continue to weaken which bodes ill for the longer term. It seems that the thesis of a summer rally followed by a decline into autumn and early next year still looks valid.

All we can do is remain nimble and opportunistic and it looks like we are one week into what could be a 4-6 week rally.

The Week Ahead

It will be an important week for economic and earnings reports as we start to move into Second Quarter earnings season. Housing will be reporting which is all important since a sustainable recovery is largely dependent on that sector, and jobs are a weak spot that also could determine the outcome of this recovery and where we go from here.

The Fed will make their interest rate announcement on Wednesday which will be widely watched and expected to hold no change. Earnings will start to come in from the tech sector which is expected to be strong and news will come from retail to offer further insight into the state of the consumer.

Economic Reports:

Tuesday: May Existing Home Sales

Wednesday: May New Home Sales, FOMC Interest Rate Meeting,

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims, May Durable Goods Orders

Friday: Q1 GDP 3rd Estimate, June University of Michigan Sentiment Final Index

Earnings Reports:

Tuesday: Adobe Systems, Carnival Cruise Lines, Walgreen Drug Stores

Wednesday: Rite Aide, Nike, Bed, Bath and Beyond

Thursday: Oracle, Palm, Research in Motion, Lennar Homebuilders

Sector Spotlight:

Leaders: Spain, Italy, South Korea

Laggards: Short Technology, Short Eurodollar

Last week I was in London which was “World Cup Crazy” with excitement for the tournament running high. I’ve never been a huge soccer fan but certainly the world could use a global celebration about now. The games are fun to watch but the “vuvuzelas,” those irritating plastic horns, have got to go.

Wishing you a great weekend wherever you may be,

John

Wall Street Sector Selector

Market Internals Strengthen on Bad Economic News

John Nyaradi — Fri, 18 Jun 2010 00:29:00 GMT

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Market internals continued to strengthen today in spite of the rise in jobless claims, weaker manufacturing, a tepid earnings report from Federal Express and ongoing weakness in the housing market.

Jobless claims rose 12,000, contrary to expected continued declines, while the Philly Fed manufacturing report took a steep drop from 21 to 8.

On the positive side of the ledger, leading economic indicators were up .4%.

Federal Express missed analysts expectations but reported highest international loads since 2007 and expect the economy to continue improving.

The National Association of Home Builders reported that their housing market index declined in May to a 3 month low, along with their future sales forecst declining to levels of March, 2009.

Markets were weaker until the last thirty minutes of trade when we saw yet another explosive finish to the upside. I was actually hoping for a pullback as the markets remain overbought on a short term basis. The 200 Day Moving Average held yet again and tomorrow is Quadruple Witching Day which we discussed earlier in the week and likely will arrive with its expected volatility.

There are no economic or earnings reports for Friday so all action will be centered around "the witch."

Fundamentals and news remain poor, as does volume and sentiment. We remain in the "Yellow Flag Flying" mode, expecting choppy prices ahead. Rising prices on bad news is good news for bulls, which, by the way, I am not. Storm clouds continue to form on the macro level while technicals point to short term strength. We remain committed to our "long" positions for now, knowing full well that sooner or later, as always happens, these differences will reconcile one way or the other.

John To get a Complimentary Special Report from Wall Street Sector Selector, click here:

Wall Street Sector Selector

Yellow Flag Flying: ETF Regime Change Ahead

John Nyaradi — Sat, 12 Jun 2010 22:44:00 GMT

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On Friday we switched to “Yellow Flag Flying” mode, expecting choppy to higher prices ahead for the short to medium term.

Support at the all important 1040 level on the S&P 500 held last week and was followed by a sharp rebound from very oversold levels. Resistance lies just ahead at 1107 on the S&P 500, the 200 Day Moving Average, and so one of two things could happen next.

If upward momentum can be sustained and prices go through and hold above the 200 Day Moving Average, I think we can see much higher prices ahead in a summer rally. If the next test of the 200 Day Moving Average holds, then we’re very likely looking at some choppy price action between 1100 and 1040.

Looking at My Screens

On Friday we entered some “long” positions in all portfolios and had some good immediate results with the following unrealized gains after one day’s action:

Standard Portfolio:

Position #1: +1.7%

Position #2: +2.2%

Position #3: +2.1%

Position #4: +1.9%

Position #5: Cash

2X Portfolio:

Position #1: +3.8%

Position #2: Cash

Option Master Portfolio:

Position #1: +6.3%

Year to date, our portfolios look like this:

Standard Portfolio: +9.1%

2X Portfolio: -15.9%

Option Master Portfolio: +53.3%

S&P 500: -2.2%

The View from 35,000 Feet

Friday started weak and ended strong which is usually synonymous with bull market action, although we still remain below the 200 Day Moving Average and so for the short term, at least, the trend remains down.

However, my signals are pointing to renewed strength in the market internals and the possibility/probability of higher prices ahead which is our reason for switching to “Yellow Flag” mode.

For the week, all major indexes were up with the Dow leading the way at +2.8% and economic news was mixed.

On Friday, retail sales were reported as declining -1.2% versus an expected gain but consumer confidence rose to the highest level in 2 1/2 years.

The crisis in Europe moved to the back burner as the European Central Bank says they’ll continue buying bonds to support the troubled nations in their group.

On the negative side of the ledger, the ECRI, Economic Cycle Research Institute reported that their weekly leading index hit a 44 week low and dipped below “0” for the first time in over a year to the lowest level since July, 2009. This would indicate dramatic slowing of the U.S. economy in the months ahead.

However, short term, market sentiment remains bearish which is bullish in the perverse way that markets work. Further indications of the small investor abandoning the stock market comes from last week’s report that Morgan Stanley is closing 300 offices and laying off 1200 employees due to declining business in their retail sector. This would be like McDonald’s not being able to sell cheeseburgers and represents the small investor voting with their feet in response to continued gut wrenching volatility in global equities markets.

What It All Means

It’s a shame, in my opinion, that the small investor has left the equities market and in the process created a huge bond bubble that will one day surely burst as all bubbles do.

No doubt the volatility is uncomfortable but for those armed with a solid trading plan, more opportunities than ever exist in today’s market. In my opinion, the old rules of “buy and hold” and “invest for the long term” have been rescinded, at least for now, and looking at the fact that the major indexes are well below their peaks of eleven years ago, it’s likely that they’ve been dinosaurs for many years already.

For the short term I see the probability of higher prices and possibly even a “summer rally,” followed by more downwards pressure moving into the autumn.

2nd Quarter earnings season is about to start and all expectations are for it to be solid. However, in a few weeks, the Census workers will be laid off and so we likely will see weakness in employment while mid-term election years are typically poor times for the equities markets. Also, I don’t think the European contagion is behind us yet and could easily resurface in a few months.

Therefore, I think the strong possibilities of lower equities prices and even a double dip recession lie ahead.

The Week Ahead

Some important economic reports this week, particularly from the housing industry and industrial production on Wednesday and the start of earnings season with bellwether FedEx on Wednesday.

Economic Reports:

Tuesday: June Empire Manufacturing

Wednesday: May Housing Starts, May Building Permits, May Producer Price Index, May Capacity Utilization, May Industrial Production

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims, May Consumer Price Index, May Leading Indicators, June Philadelphia Fed Report

Earnings Reports:

Tuesday: Best Buy

Wednesday: FedEx

Sector Spotlight:

Laggards: Short Financials, Short Europe, Short Small Caps

Leaders: Spain, Real Estate, Australia, Italy

Summer has finally come to Bend as cold and rainy days gave way yesterday to dazzling clear skies and sunshine. I went out for my first fly fishing day of the season on the Deschutes River, where the weather delayed salmon fly hatch was on. Salmon flies are these big, prehistoric looking bugs that hatch in the bushes and trees and then fall into the river where the trout lay in wait and the fishermen wait for the trout.

It struck me that fly fishing is something of an odd sport. Grown men standing in a river, waving a stick and trying to fool a fish into thinking they’re a bug. But no more odd, I guess, than chasing a white ball around a course or a few hours at a time.

Let’s make this summer a great one.

Wishing you a great weekend wherever you may be, To get a Complimentary Special Report from Wall Street Sector Selector, click here:

John

John Nyaradi

Publisher

Wall Street Sector Selector

Was Today's Stock Market Action the Start of a New Rally?

John Nyaradi — Fri, 11 Jun 2010 02:54:00 GMT

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Today's volatile upswing likely marks the end of this correction and perhaps the beginning of a new uptrend.

We will reposition our portfolios from cash to various ETF positions tomorrow morning and readjust from the "Red Flag" mode, expecting lower prices ahead, to the "Yellow Flag Flying," anticipating choppy and possibly higher prices ahead.

The 200 Day Moving Average on the S&P 500 is significant resistance and is just approximately 2% above current levels and so we could see some choppy and volatile action as this level is retested.

A couple of previous retests have failed and so a break above would likely lead to higher prices ahead.

The low end of this move, around S&P 1140 was tested and held. That was significant support and so we expect some choppy action between these levels for a time.

However, the driving catalyst of falling prices, the crisis in Europe and with the Euro has been put on the back burner, at least for now, and so with earnings season just ahead, we could see higher prices ahead.

In any case, expect volatility to continue and we will have to be nimble to be successful in today's challenging markets.

This weekend's update will include a complete look at this week's action and our look ahead for the possibility of a summer rally and what the autumn might bring.

All the best, To get a Complimentary Special Report from Wall Street Sector Selector, click here:

John

Wall Street Sector Selector

Get Ready for a Double Dip

John Nyaradi — Sun, 06 Jun 2010 00:36:00 GMT

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In my view, it’s becoming increasingly likely that we’re rapidly heading towards a double dip recession. It won’t be tomorrow or this week or even next month, but many warning flags point towards significant deterioration in the U.S. and global economy going forward and so I think that by the end of the year or early 2011, we could very likely be facing a new leg down in the world’s economic situation.

We’ll take a look at some of the factors at work but first let’s take a look at the past week and where we stand at Wall Street Sector Selector.

Looking at My Screens

Obviously the volatility that has come back into the markets in recent weeks was in play last week as the Dow experienced its third worst drop of the year on Friday, fast on the heels of Wednesday’s “melt up.”

This week’s action took our Standard, 2X and Option Master Portfolios to 100% cash as we took profits and cut losses during the week.

Currently our portfolios look like this year to date:

Sector Selector Standard: +7.5%

Sector Selector 2X: -17.8%

Sector Selector Option Master: +47.1%

This week’s positions were closed for the following gains/losses:

VXX: +50.3%

EFZ: +2.8%

YXI: -8.5%

PSQ: -5.3%

EEV: +5.9%

SKF: -12.9%

December

S&P Put Option: +29.7%

We remain in the “Red Flag Flying” mode, expecting lower prices ahead. However, almost incredibly, our indicators are moving towards a new “buy” signal that we might see confirmed within the next days or weeks.

A quite likely scenario is a relief, short term rally through August-September, followed by further declines into 4th Quarter and next year.

Whatever happens, we will continue working both the “long” and “short” side of this market that remains unbelievably volatile and challenging.

The View from 35,000 Feet

This week’s action was driven by conflicting forces but ended largely negative, with the S&P 500 unable to break through its 200 Day Moving Average. As we’ve said before, this average is widely viewed as the demarcation line between bull and bear markets, and until or if the major indexes are able to sustain positive momentum above this line, we can consider that we are in a bear market, at least for the short term.

The big catalyst for Friday’s sell off, of course, was the Non Farm Payrolls report that came in far weaker than expected at 431,000 versus a whisper number of 500,000. Adding to the worries was the fact that only 41,000 of these new jobs were “real” private sector jobs, with most of the rest coming from temporary census workers.

Further worries were the Euro hitting a four year low, Hungary saying that their situation was “very grave,” and less than robust reports in consumer spending, pending home sales and factory orders.

More troubling in my opinion was the ECRI (Economic Cycle Research Institute) report of its weekly index hitting a 43 week low and its annualized index hitting a 50 week low. This is a highly accurate leading indicator of U.S. economic activity and points ominously towards the double dip recession that we’ve been considering.

At this week’s G-20 meeting, Treasury Secretary Geithner called on the Europeans to adopt the “American fix” to current problems by increasing government spending and quantitative easing to stimulate growth but he was firmly rebuffed by European leaders who are going instead for deficit reduction and austerity programs over fiscal stimulus.

What It All Means

Looking over the past year’s growth and stock market rally, we see a liquidity rally fueled by stimulus and various bailouts, and as those draw to a close, the question of the hour is whether or not this economic growth has become self sustaining or not.

Many experts expect a natural slowing as these programs are removed from the system and the situation in Europe can only be a tremendous drag on the global economy as the Eurozone retrenches and cuts their spending and consumption.

It seems that, unlike us, the Europeans are willing to take their medicine now and resolve their problems rather than “kicking the can down the road” as we’ve done in America. Of course kicking the can sidesteps current pain but will only serve to make the “day of reckoning” worse because the piper will still demand to be paid.

The Week Ahead

Economic Reports:

Monday: April Consumer Credit

Wednesday: April Wholesale Inventories, June Fed Beige Book,

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims

Friday: May Retail Sales, June Michigan Sentiment Survey, April Business Inventories

Sector Spotlight:

Leaders: Short Financials, Short Europe, Short Small Caps

Laggards: Oil Services, Italy

Wishing you a great weekend wherever you may be, To get a Complimentary Special Report from Wall Street Sector Selector, click here:

John

Wall Street Sector Selector

We Face Extraordinary Danger and Extraordinary Opportunity

John Nyaradi — Mon, 31 May 2010 17:09:00 GMT

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As I look across the global landscape today, I see extraordinary danger and extraordinary opportunity.

Danger comes from the deteriorating economic environment at home and abroad and extraordinary opportunity comes from the enormous volatility and opportunities to “short” the market followed by a once in a generation opportunity to “buy dollars for dimes” once a bottom to this market has been reached.

Over the next five years we will see more bankruptcies, both individual and sovereign, than we’ve seen in our history and we’ll also see more millionaires and billionaires created than ever before.

As individuals we will each make one of two choices. We can assume the “deer in the headlights” posture and stash our money under the mattress, or we can educate ourselves, take prudently managed risk and work to take advantage of the enormous opportunities that will present themselves.

Looking at My Screens

This week we saw enormous volatility in every asset class as global forces washed over the markets of the world and investors/traders tried to position themselves on the only side of the market that counts, “the right side.”

The downtrend that started in April is still firmly in place, notwithstanding Thursday’s rally from oversold levels and we remain in the “Red Flag Flying” mode expecting lower prices ahead.

Taking a look at the chart of the S&P 500 we see:

Chart courtesy of http://www.stock.charts.com

In the chart above, we can see that the S&P remains just below its 200 Day Moving Average which will provide significant resistance while the MACD remains on a sell signal but momentum is turning up. Above the blue 50 Day Moving Average is rolling over and the 200 Day red line is flattening which is also a bearish indicator.

So for the time being, at least, we remain in a bearish configuration, expecting lower prices ahead.

By the way, if you share our view and expectations of lower prices, this week’s mega rally on Thursday presented some extraordinary buying opportunities on the “short” side with relatively low risk at the moment.

Members note that this week’s Position/Stop Loss Update will be sent on Monday afternoon due to markets being closed for the holiday weekend.

The View from 35,000 Feet

One thing about this period we’re living in is that there is no shortage of news and analysis for a financial newsletter writer like myself. Every week seems to bring an almost unbelievable torrent of news and economic developments that make for a wild ride, indeed.

This week was no different and here are some of the high points:

1. On Friday, U.S. equity markets were roiled when Spain’s credit rating was downgraded by Fitch Ratings in spite of the $1 Trillion bailout package recently enacted by the European Union. (Speaking of the bailout, I don’t think there has ever been a time when $1 Trillion did absolutely nothing to mend a problematic situation.)

2. The Euro weakened yet again, now down nearly 20% against the dollar over the past half year.

3. LIBOR, the London Interbank Offering Rate is near a yearly high

4. The month of May just ended (mercifully for most investors) was the worst month for the Dow Jones Average in 70 years.

5. The ECRI, Economic Cycle Research Institute reported that its weekly index dropped to a 6 month low while its yearly index dropped to a nearly 12 month low. Both numbers show acceleration in the slowdown of U.S. economic growth

6. Consumer spending was flat in April which was unexpected and ominous since the U.S. consumer accounts for more than 70% of our GDP.

7. The Chicago Purchasing Managers Index, a broad measure of economic activity, fell in May and posted the largest decline year to date.

8. Tensions on the Korean Peninsula continue to escalate towards possible open conflict between the north and south and joint American and Republic of Korea forces are conducting naval exercises this weekend off the coast of North Korea in a show of force in the region.

9. .Congress passed an $80 Billion “mini-stimulus” bill to extend unemployment benefits yet again as the job market fails to develop sufficient new employment.

10. The Greeks are already discussing potential modifications to their planned “austerity” programs.

And here’s a truly terrifying chart from Washington’s Blog, one of the fine blogs that I read on a regular basis:

Chart courtesy of Washington’s Blog

This is a chart of the Dow Jones during the stock market crash of the 1930s and it doesn’t take a rocket scientist to note the eerie similarities to our world today.

You can see how it starts with a nice run up, followed by an initial crash in 1929, then a 60% rebound that was followed by a waterfall decline, bringing the Dow to a loss of 89% before it was all over.

As eerily similar as this price action is to current conditions, what is even more spooky is the little known fact that the second, larger decline was triggered by a credit crunch and banking crisis in Europe that began in Austria and spread to Germany. That crisis sowed the seeds of the Great Depression and the social unrest that eventually spawned The Third Reich and World War II.

Scary stuff, indeed.

What It All Means

You see what I mean about these being exciting times in our financial world. Any one of these items would provide sufficiently rich fodder for a weekly newsletter, but so much is happening so fast that we’re now aggregating these into bullet points and executive summaries to get through it all.

Looking over the above list we can draw the following conclusions:

· Europe is in severe jeopardy and any possible solution will generate further drag on the global economy, at the very least, and social and financial chaos on the outlier end of possible events.

· A global credit crunch is rapidly spreading like a forest fire as banks become less eager to lend and sovereign nations run into credit problems themselves.

· Numerous reliable economic indicators point to a dramatic slowing of the U.S. economy and the ever growing possibility of a double dip recession.

· Any misstep or accident along the way, like a major sovereign default or war on the Korean Peninsula, could easily trigger a financial meltdown and subsequent deeper recession or depression.

But as I mentioned earlier, each one of these factors presents enormous opportunity, because with danger there is opportunity, and with extreme danger comes extreme opportunity.

Our goal at Wall Street Sector Selector will simply be to continue deploying strategies and tactics designed to sidestep the dangers and take advantage of the opportunities as they come our way.

I’m excited about the possibilities and look forward to continuing our work together towards capitalizing on these exciting times.

The Week Ahead

This will be another huge week for economic reports (as though we need yet another week of whipsaws and volatility) with a look at the all important real estate markets on Tuesday and Wednesday and the granddaddy of all employment reports, the Non Farm Payrolls Report, coming on Friday.

Economic Reports:

Tuesday: April Construction Spending, May ISM Index

Wednesday: April Pending Home Sales, May Auto Sales,

Thursday: ADP Employment Change, April Factory Orders Initial Unemployment Claims, Continuing Unemployment Claims

Friday: May Non Farm Payrolls

Sector Spotlight:

Leaders: South Africa, Brazil Small Cap, Natural Gas

Laggards: Oil Services, Spain, Long Treasuries

So now a rough May is in the books and so far, at least, “sell in May and go away,” appears to be sound advice.

This weekend we were in Carson City, Nevada, for a big swim meet with my young son. My eldest son is home from college and so it’s nice having all four of us together again, short though it will be.

We took a drive around Lake Tahoe which is truly one of the Seven Wonders of the World and stopped into a casino or two to try our luck and I realized how casino-like world financial markets haave become.

I hope you’ll have a great Holiday Weekend and let’s all take a moment to remember why it’s a holiday and celebrate the men and women who have died serving our country.

We visited Arlington Memorial Cemetery last summer and saw the acres of symmetrical white markers stretching across the hillside above Washington, D.C., and our problems are nothing when compared to the families who arrive there everyday to add a new cross to that pantheon of true national heroes.

Wishing you a great weekend wherever you may be,

John To get a Complimentary Special Report from Wall Street Sector Selector, click here:

Wall Street Sector Selector

A Big, Bad Bear Market Just Ahead?

John Nyaradi — Sun, 23 May 2010 01:36:00 GMT

To get a Complimentary Special Report from Wall Street Sector Selector, click here:

Recent stock market action has brought major indexes around the world into bear market, or at least significant correction territory.

At Wall Street Sector Selector, we remain in the “Red Flag Flying” mode, expecting still lower prices ahead.

We had a good week in our inverse and cash positions and our current portfolios year to date are as follows:

Sector Selector Standard: +12.6%

Sector Selector 2x: -10.6%

Sector Selector Option Master: +60.5%

This week we added two inverse ETF positions in the Standard Portfolio, one to the 2X and maintained our Put Option position in Option Master.

Also, I'd like to invite you to attend our May Wall Street Sector Selector Webinar scheduled for Monday, May 24th at 1:15 pm. Click here to attend

Looking at My Screens

Aside from providing plenty of fireworks this week, global stock market action inflicted significant technical and psychological damage on indexes around the world. Some of the statistics are quite shocking and we’ll take a close look at the current state of the markets and where we might go from here.

One of the main charts I use in my work at Wall Street Sector Selector to determine the overall status of the market is the NYSE Bullish Percent Indicator.

Chart courtesy of www.stockcharts.com

In the above chart, you can see that the BPNYA went to “Bear Confirmed” status on May 21, 2010. This indicator measures the percentage of stocks on the New York Stock Exchange that are on Point and Figure Buy Signals and whether or not the entire universe of NYSE stocks is in an uptrend or downtrend.

Above we can see that approximately 50% of NYSE stocks are on buy signals and that the last column of “Os” broke a double bottom to generate the “bear confirmed” signal.

You’ll also notice that the last column of Os made a lower bottom than the previous column of Os which tells us that this current decline is more broad based than the one in January and we see a pattern of lower highs and lower lows which indicates an overall weakening market environment.

Chart courtesy of www.stockcharts.com

In the chart above of the S&P 500, we see that the index has broken decisively below its 200 Day Moving Average which is commonly thought of as the demarcation between a bull and bear market. So far, just two days have closed below this average and it usually takes several days below the 200 Day Moving Average to confirm a new bear market, so clearly this chart offers a second early warning indicator that a new bear market might be upon us.

Chart courtesy of www.stockcharts.com

In the chart above, we see that the S&P broke a double bottom on May 21, 2010, and so generated a “sell” signal with an initial price target of 940. The S&P is still above the blue Bullish Support Line so according to point and figure charting methodology, the primary trend is still up. However, a break below approximately 920 would indicate a new negative long term trend in the index.

From the above discussion we can see that current indications would support the thesis that we’re in at least a short term correction or that a bear market has or is about to start.

Other startling facts abound:

On the New York Stock Exchange, just 51% of stocks still remain above their 200 Day Moving Average, down from approximately 85% at the beginning of May, just three short weeks ago.
12% of stocks are above their 50 Day Moving Average, down from almost 90% at the beginning of the month.
The Shanghai Stock Exchange, often thought of a as a bellwether index, is in solid bear market territory, down -20% from its recent highs, while U.S. indexes flirt with traditional definitions of “correction,” declines of -10% or greater.

The View from 35,000 Feet

Most of the recent carnage has been attributed to the problems in Europe with sovereign debt and the collapse of the Euro but there is more to the story as this stock market shakeout rattled countries around the world.

The problems begin in Europe where the survival of the Euro and the European Union is at stake and their leaders and populace seem unable to get in front of this issue. While the bureaucrats dither, the people strike and march in the streets and it increasingly appears that the entire zone could descend into financial if not political anarchy.

Moving around the world to China we see the new economic engine of the world sputtering as it deals with a real estate bubble and the threat of inflation and so is tightening credit and raising interest rates while the rest of the world battles with what could be impending deflation and depression.

At home investors experienced yet another trying week as volatility spiked to new highs and people watched the markets shave billions off their retirement savings.

Fortunately, we were immune from the carnage as we watched the drama unfold.

Yellow lights flashed everywhere as economic reports came in through the week:

· May Empire State manufacturing report sports steep decline

· April Building Permits unexpectedly fall

· Initial jobless claims rise unexpectedly

· Consumer Confidence falls unexpectedly.

· April Producer Price declined -0.1%, unexpectedly

· April Leading Economic Indicators declined, unexpectedly

· LIBOR continued to rise to highest levels in nearly a year.

· Oil declined nine days straight on doubts regarding the strength of the recovery.

· Another bank failed, bringing year’s total to 73.

· Reuter’s reports that the Economic Cycle Research Institute Weekly Leading Index hit a 35 week low and its annualized index dropped to a 43 week low, prompting Lakshman Acuthan, director of ECRI, to say, “With WLI growth sinking further to a 43 week low, U.S. economic growth is set to start easing in fairly short order.

What It All Means

Adding it all up, it’s difficult to make an argument for a robust stock market going forward on either a technical or fundamental basis while it’s quite easy to forecast a new bear rumbling down the path towards us.

As investors and traders, we have two choices if we believe a new bear market is upon us; actually three.

The first choice is to “buy and hold” which is the conventional wisdom and which I believe is quite ineffective in today’s volatile markets since the Dow is still far below where it was in 2000 at the beginning of the “tech wreck” more than 11 years ago.

The second choice is to head for the safety of cash which many investors have done or to head for the safety of Treasury bonds and bills which have also seen a huge influx of funds in recent months and days. This strategy gets you out of harm’s way if the market indeed does continue its downward trajectory.

The third choice is to actually attempt to profit from declining markets and to do that, investors/traders today can use inverse exchange traded funds that move opposite to the action of the underlying index.

That, of course, is our goal at Wall Street Sector Selector and all of our strategies and tactics are designed to seek out opportunity and profits regardless of whether the markets are going down or up.

In the short term, I believe we will see an attempt to retest and close above the 200 Day Moving Average on the major indexes which may or may not fail. Recent down days have been on huge volume while up days have been on low volume, and so overall, the path of least resistance is most likely down in the medium to long term.

The Week Ahead

Economic Reports:

Monday: April Existing Home Sales

Tuesday: March Case/Shiller Home Price Index, May Consumer Confidence

Wednesday: April Durable Goods, April New Home Sales

Thursday: Quarter 1 GDP second estimate, Initial Unemployment Claims, Continuing Unemployment Claims

Friday: April Personal Income, April Personal Spending, May Chicago PMI, May University of Michigan Consumer Sentiment

Earnings Reports:

Wednesday: Toll Brothers

Thursday: Costco, Novell

Sector Spotlight:

Leaders: Short everything

Laggards: Coal, Australia, emerging markets.

Today I took my 17 year old out to Bend Airport for a “discovery” flight to see if wants to pursue a private pilot’s license. He’s thinking of being a Navy pilot and so trying out flying seems like a good idea. We took some pictures of us together with his instructor and it took me back to the spring of 1968 when I took my first flight in a Cessna 150, more than 42 years and 20,000 flying hours ago. As I watched him takeoff and climb out in the gusty breeze, I could only wish him a good ride and Godspeed.

All the best,

John To get a Complimentary Special Report from Wall Street Sector Selector, click here:

John Nyaradi

Publisher

Wall Street Sector Selector

We Had a Good Day

John Nyaradi — Thu, 20 May 2010 21:55:00 GMT

To get a Complimentary Special Report from Wall Street Sector Selector, click here:

We had a good day today as we remain in the “Red Flag Flying” mode, expecting lower prices ahead.

Our portfolios year to date are as follows:

Sector Selector Option Master: +73.3%

Sector Selector Standard: +14.4%

Sector Selector 2X: -4.0%

Today was a total wipeout as a global stock market rout rolled around the world in response to the ongoing crisis in Europe and declining confidence worldwide. Today’s drop in the Dow was its largest one day decline since March 5, 2009, just before the now infamous “March lows” and bigger than last week’s “flash crash.”

Overseas the bungling bureaucrats in Europe continued to struggle with the crisis of the plunging Euro and were once more unable to get in front of this problem in spite of reportedly significant central bank intervention.

At home, new jobless claims jumped unexpectedly, April leading economic indicators declined and there are growing signs of a worsening credit crunch as interbank lending rates continue to rise.

The S&P 500 is now in official “correction” territory, down -11% from recent highs and more ominously, has now closed below its 200 Day Moving Average which is widely viewed as the demarcation line between bull and bear markets. If it’s unable to recover above the 200 Day Moving Average, even lower prices could be expected.

Friday is options expirations day which oftentimes brings even increased volatility and so it should be an interesting end to an interesting week.

John

Wall Street Sector Selector

Wolf Pack Draws Blood

John Nyaradi — Sun, 16 May 2010 20:54:00 GMT

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In recent weeks, various financial and political leaders in Europe have described “unscrupulous, evil speculators” as a “wolf pack” out to destroy the Euro, Greece and even the European Union.

This week the wolf pack drew blood as the Euro fell to its lowest value since Lehman Brothers went belly up in September, 2008, and the European Union faces the very real threat of its potential destruction.

Global markets in nearly every asset class responded violently to these problems and we’ll take a look at all of this in greater detail and talk about what it might mean going forward.

Looking at My Screens

Our portfolios continue to perform well as we remain in the “Red Flag” mode, expecting lower prices ahead.

Year to date our performance looks like this:

Standard Portfolio: +8.7%

2X Portfolio: -2.5%

Option Master: +19.0%

As always, the chart tells the story:

Chart courtesy of StockCharts.com

In the chart above we can clearly see how the S&P 500 has gotten progressively more volatile in recent days and now is well below its 50 Day Moving Average. The 200 Day Moving Average is the red line at 1100; just less than 4% down from here which is widely viewed as the demarcation between bull and bear markets.

In the bottom screens, MACD remains on a “sell” signal with negative momentum while the Full Stochastic appears to be curling over and generating another “sell” signal after a short climb up from oversold levels.

Overall, this is at least an intermediate correction within an uptrend, but in spite of all the fireworks, the index is just -6.4% below its recent highs and so recent action, while violent, is not too dramatic as corrections go.

The View from 35,000 Feet

This week’s market action saw intense volatility in all asset classes as global participants fought to adjust to the uncertainty and dangers in Europe.

The “wolf pack” continued its attack on the Euro, driving the common currency down -3% for the week to an 18 month low and down -9% on the year.

More bad news poured in this week as Moody’s considers downgrading Greece to “junk” which is also bad news for Portugal which holds a high percentage of Greece bond debt. Spain and Italy are tottering on the edge, as well, and even the CEO of Deutsche Bank, one of the biggest lenders in Europe, voiced doubts that Greece would be able to repay the loans currently coming its way.

The Euro isn’t the only currency under duress as the wolves also went after the British Pound which took its third weekly hit in a row, dropping -1.8%.

While new Prime Minister David Cameron most likely doesn’t have his boxes unpacked at 10 Downing Street, pundits are already forecasting a collapse of his coalition government and new elections as soon as the end of this year.

The Pound has been pounded, down nearly -3% since the Conservatives and Liberal Democrats got together to form their new coalition, and the situation has reached truly Alice in Wonderland proportions as it has become cheaper to insure U.S. corporate debt than European Sovereign debt.

Meanwhile George Papandreou, Prime Minister of Greece, says his country might sue U.S. banks for their role in the debt crisis, (those evil speculators again) but he’ll have to get in line as seemingly every major bank in the country is under investigation for one sort of irregularity or another related to the mortgage markets. And speaking of banks, six more failed this weekend, bringing the yearly total to 72.

U.S. stock markets gyrated wildly in response to all this action with 100 plus or minus point moves on the Dow becoming the “norm,” while Gold reached an all time high as investors fled to the metal and (GLD) the largest gold ETF expanded its holdings to $50 Billion.

Oil fell -4% to a 3 month low as fears of deflation and a slowing economy settled deeper while U.S. bankruptcies were up 17% year over year in the 1st Quarter and up 4% from the 4th Quarter.

What It All Means

The contagion that seems to be spreading through Europe and around the world is an unwelcome development along to the road to recovery that seemed to be going along so well until just a few weeks ago.

At stake is the very survival of the Euro dollar and the European Union, along with major banks around the world and the stability of global stock markets.

It’s hard to see a good way out of this as all nations simply have too much debt and the problem has morphed from a corporate problem and a mortgage related problem into an international problem at the governmental and central bank level.

Austerity programs or higher taxes to reduce debt will likely lead to a global slowdown and a possible double dip recession, while default or restructuring could lead to a global banking collapse.

Europe has shot their “nuclear option” and the market isn’t buying it as the ‘wolf pack’ goes after the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) and even bigger game like the United Kingdom.

I don’t see a quick or easy fix to any of this which means that we very likely could see continued volatility and wide swings in asset class prices.

Without a fix to this global contagion, the likely outcome would be more downwards pressure on stocks and European currencies with corresponding upwards pressure on gold, U.S. Treasuries, Japanese Yen and other perceived “flight to safety” assets over the days and weeks ahead.

However, in the very short term, the Euro is vastly oversold, as are U.S. markets, and so a technical bounce higher would not be unexpected. Fundamentally, if the European Finance Ministers meeting on Monday and Tuesday can pull a rabbit out of their hats and put together some sort of credible strategy to resolve this crisis, a quick turn in the markets could be seen.=

The Week Ahead

This week wraps up U.S. earnings season which became little more than a sideshow with the dramatic international action and we also have some important economic reports ahead.

Economic Reports:

Tuesday: April Building Permits, April Housing Starts

Wednesday: April Consumer Price Index

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims, April Leading Economic Indicators, May Philly Fed

Earnings Reports:

Tuesday: Wal Mart, Home Depot, Hewlett Packard

Wednesday: Target

Sector Spotlight:

Leaders: Small Caps, Peru

Laggards: Euro dollar, Oil

It’s a quiet weekend at home and a good time to rest up for what promises to be another tumultuous week ahead. The current situation carries enormous danger along with enormous opportunity and I look forward to continuing our work together as we seek to take advantage of the opportunities and sidestep the dangers in these fast moving markets.

The wolf pack will be on the hunt and so will we.

Wall Street Sector currently holds positions in AGQ, EEV, SLV, VXX, EFZ, and SPY Put Options. Positions can change at any time

All the best, To get a Complimentary Special Report from Wall Street Sector Selector, click here:

John

Wall Street Sector Selector