photo credit: TIO…

“As a general proposition, when told by unanimous elites that a particular course of action is urgent and necessary to avoid disaster, there’s a lot to be said for going fishing*. If the entire global economy is so vulnerable that only the stalwart action of Barney Frank stands between it and ten years of soup kitchens, can it, in fact, be saved? Or look at it the other way round: Given any reasonable estimate of the number of headless chickens running around, was the five per cent fall in Asian markets and seven per cent “plummet” on the Dow in reaction to the House vote really the catastrophe some of my pals round here seem to think it was? If fear of seven per cent falls is enough to justify massive unprecedented government intrusion into the private sector, we might as well cut to the chase and go for the big Soviet command economy.”

Source: National Review Corner

By Babak

As opposed to just a few weeks ago where I had to scrape bits and pieces of information to put together a sentiment overview, this week we have an overabundance of data and indicators, so lets get started:

Hedge Funds Net Short
Based on information from Carpenter Analytical Services, the average hedge fund was just until recently net short to the same degree as mid 2004 and early 2003. I’d suggest taking that with a grain of salt because hedge funds are by their very nature nebulous and non-transparent. Carpenter “reverse engineers” hedge fund positions starting from their performance. While this metric is far from 100% dependable it does provide limited insight into how the brightest traders are positioned.

More important than the snapshot of hedge funds being net short, I’d like to see the market continue to go lower, or level off, while the hedge funds aggressively change their posture and go net long. This is what we saw in mid 2003 just before the S&P 500 took off like a bottle rocket from the bear market depths it had sunk to. On the other hand a dangerous situation brews if the market continues to meander or even manages a feeble rally while hedge funds continue to aggressively bet against it.

Cash Is King
Combined with the net short positions, hedge funds are strangely hiding a significant amount of assets in cash. According to analysts at Citigroup, hedge funds have now socked away $600 billion in cash with $100 billion of that in money market funds. This is highly unusual because assets are invested with hedge funds with the view that they will be invested in the most sophisticated methods allowing for market neutral returns.

The extreme cash position is a sign of temporary uncertainty as the whole market seems to be news driven now. It may also be a result of the new short sale restrictions (although hedge funds can easily circumvent them, it may not be politically expedient to do so). On the plus side, it represents a formidable force that is being kept in reserve, if and when the bull market resumes.

The massive cash horde is also matched by the mutual fund industry with the average equity fund (non-index) holding 5.4% of assets cash. According to Morningstar, this is slightly below the record of 5.5% set in late 2007.

ISEE Sentiment Index
Last week after pointing out that the ISE options sentiment was acting strange, the ratio started this week with a jump to 136 (from a low of 66). As retail option traders rushed to buy call options over put options, the market tumbled down ~1255 (S&P 500 Index). I continue to wait for this indicator to give us a true showing of fear from the retail option traders. We came close last week but with this week’s recovery in the ISE sentiment index, unfortunately, it seems we will have to muddle through until perhaps we see a sharp waterfall decline take us through to real panic.

CBOE Put Call Ratio
This option metric is also showing a muddled picture. As I mentioned briefly last week, the CBOE put call ratio fell to 0.51 but since then it has quickly recovered, as if all the talk of financial Armageddon is simply being ignored by main street investors. This level of complacency is not something that gives a contrarian much confidence that this new found stability in the market holds promise.

Corporate Insiders
From the Vickers Weekly Insider Report, corporate insiders continue to act bullish in the face of the market decline. The ratio of insiders purchase and sale of company stock is as bullish as it was in mid July 2008 and towards the end of the bear market in 2002. Although this is a reliable and quantified indicator (as opposed to bearish or bullish sentiment) it should be projected into an intermediate time frame and not used to make short term trading decisions.

Sentiment Surveys
According to the American Association of Individual Investors [[AAII]], there is less pessimism this week with only 45.74% bears and slightly higher bulls 34.04% (than last week). I’m not happy to see this because the market is actually lowered than where it closed last week! So to see an uptick (even a small one) in bullish sentiment is disappointing… if one expects this to be the floor for the market.

The Investor’s Intelligence sentiment survey which measures where newsletter editors stand (as judged by ChartCraft) is little changed with 37.5% bulls, 40.9% bears (a slight decrease).

Mark Hulbert, of the Hulbert Financial Digest, suggests that the best performing market timers are significantly more bullish now than their less astute peers. This may seem to be a bullish sign but for the fact that the top performing market timing newsletter editors have been more bullish for most of the market decline. The key, I suspect, is to watch for the deviation between the two camps to widen to a significant enough gap to merit contrarian attention.

Conclusion
The mood is discernibly grumpy on Wall Street. And the financial sector is not the only one to be punished mercilessly. Take for example, Research In Motion (RIMM) which announced earnings that barely managed to disappoint due to slightly higher expectations. Even though they are a profitable company, they were taken behind the shed with a an almost 30% decline in one day!

Having said that, considering the historic and unprecedented situation, it is unusual to not see every single sentiment indicator not stuck at its most extreme reading possible. Arguably, we still have not seen full blown panic selling to completely wash out all the weak hands.

Source: Seeking Alpha

One billion one dollar bills stacked on top of each other would be 63 miles high.

700 billion one dollar bills stacked side-by-side would go almost two times around the Earth.

We’re talking real money here.

BY DAVID HOGBERG
INVESTOR’S BUSINESS DAILY

Treasury Secretary Henry Paulson’s massive financial bailout may be the beginning of an era of government expansion.

If Congress passes the $700 billion plan, the odds increase of greater government involvement across the economy, experts say.

“The shutting down of government involvement and the market knows best — that era is over,” said Lawrence Mishel, president of the pro-union Economic Policy Institute. “Market fundamentalism is taking a beating in policy circles and the public mind.”

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The Treasury bailout plan to recapitalize the U.S. banking system may help the U.S. avoid a deep and protracted recession. But even if the plan succeeds, it almost surely will not prevent a recession.

The major reason for this is that the credit markets have been under incredible stress for well over a year, and have recently taken a significant turn for the worse. During the last two weeks, the spread between Libor (the cost of borrowing between banks) and the rates on zero-risk Treasury bills exploded to more than 300 basis points, the widest gap since October 1987. This kind of stress reflects fear and a lack of trust among banks, which will be reflected in the real economy with a lag.

The commercial-paper market — which funds auto loans, credit cards, and short-term working capital for businesses — also is under incredible stress. Spreads on asset-backed commercial paper relative to comparable maturity Treasurys rose to more than 500 basis points in recent weeks. Not surprisingly, the commercial-paper market shrank by more than $100 billion in the last two weeks. It’s down by more than $520 billion since the summer of 2007, when the credit crisis began.

The Federal Reserve’s Senior Loan Officer’s Survey also shows record fractions of loan officers reporting tighter lending standards for the broad swath of business and household credit. Similar spikes in lending standards during 1990 and 2001 were marked by recession.

If a recession is unavoidable, the question is how deep and long it will be. While second quarter real GDP showed respectable 2.8% growth, trade was the only thing keeping the economy above water: Gross domestic purchases contracted during the second quarter. Gross domestic purchases also contracted during the fourth quarter of 2007, and only rose by 0.1% at an annual rate during the first quarter.

More bad news: Real retail sales growth has been negative on a year-to-year basis for nine consecutive months, the longest streak of declines since 1991. This data, and the tremendous spike in both jobless claims and the unemployment rate, are telltale signs of an economy that is in reverse gear.

The best we can hope for is that the downturn remains mild — and for a modest recovery to take shape in the second half of 2009. But the fiscal policies of the next administration will play a crucial role here. If tax rates on capital and labor are raised sharply, a hoped-for recovery may be jettisoned altogether.

Some have suggested we’re close to the housing price bottom. That’s hard to imagine, as new home sales just sunk to new cycle lows in August while inventories remain at elevated levels. New home sales bottomed three years before prices in the housing recovery of the early 1990s. Home prices also remain elevated relative to rents in a way they were not at the bottom of the home-price cycle in the early 1990s.

On the inflation front, the most recent bout of credit stress has a silver lining: Industrial commodity prices have declined sharply. At the same time, bond market inflation expectations recently receded to the lowest level in six years. Gold has risen aggressively off the lows of mid-September but remains below the March peak. The dollar is off the September highs, but is also well above the record lows seen in April. Collectively, these market-based signals suggest that headline inflation will ease from the 17-year highs seen in July.

The likely easing in inflation in the months ahead may not be permanent. In the past two weeks, the Fed’s balance sheet (the asset side of the monetary base) has exploded by nearly $300 billion. Yet this avalanche of liquidity has done little to relieve strains in credit markets. In other words, we cannot expect central-bank liquidity to be a substitute for financial-sector solvency.

The long-term outlook for price stability now depends on whether the Treasury pays for the bailout by selling U.S. debt to the public, or if the Fed finances it with printing-press money. If it is the latter, there will be an inflationary legacy that long outlasts the 2007-2008 credit crises.

Mr. Darda is the chief economist of MKM Partners.

Source: Wall Street Journal Opinion

Bill Carrigan

So far, 2008 has been a memorable year for investors. The Dow Jones industrial average is down 16 per cent. Financial component American International Group vaporized and now bellwether General Electric Co. lowered its earnings guidance for the third quarter.

Pile on the U.S. rescue plan and you have the perfect window of opportunity for investors.

This may be the best time to own stocks since the over-sold conditions of early 2003.

Perhaps a review of the crisis will help support my argument.

On Wednesday, U.S. President George W. Bush appeared in a prime-time television address warning Americans and Congress that failing to act on a $700 billion (U.S.) financial industry bailout could lead to “a long and painful recession.”

Bush administration officials warn of a looming economic disaster if Congress fails to act swiftly to fund a bailout that would be larger than the total cost of the Iraq war and the most sweeping government intervention in the financial market since the Great Depression.

The bailout talks are reminiscent of a Star Wars episode with the Dark Side (Wall Street) at the mercy of the Force (Main Street).

Main Street has a problem bailing out Wall Street executives who demand free market opportunity in good times and then beg for socialism during a financial crisis.

During an interview on CNBC’s Squawk Box, bond expert Bill Gross, founder and chief investment officer of investment management firm PIMCO, said “the package really is a pro-Main Street package,” and “it’s the first program really where taxpayers will benefit.”

If that observation is true, we as investors need to look at the stocks representing Main Street for guidance during the crisis.

The Dow is conveniently loaded with such Main Street stocks as Coca-Cola Co., Home Depot Inc., Johnson & Johnson, Kraft Foods Inc., McDonald’s Corp., Procter & Gamble Co., Wal-Mart Stores Inc. and Walt Disney Co.

When the weekly charts of these stocks are studied we find all are not only trading above their 2008 lows, several are within striking distance of new 52-week highs,

Our chart this week (available at thestar.com) is that of the daily closes of Dow component Walt Disney plotted above the daily closes of Dow component Home Depot.

Note the respective July 2008 lows on each plot and observe the current higher prices.

These higher lows are bullish and currently over one half of the 30 Dow components are displaying the same pattern.

These higher lows are also constant with a basic tenet of the Elliott Wave Principle, in that if a higher low is accompanied by increased investor fear and worse fundamentals the prior low was likely a bottom.

I would think these conditions have been satisfied for most of the Dow components.

We currently have more than half of the Dow components trading above their July 2008 lows – and we certainly have much more to worry about now than back in mid-July.

This sets up a classic condition of divergence between the current market price of stocks and the level of investor fear and anxiety. We now have higher stock prices occurring with higher levels of fear.

And there you have it, thanks to a little Elliott Wave. This may indeed be the best of times to own stocks since the over-sold conditions of early 2003.

Bill Carrigan is an independent stock-market analyst. His Getting Technical column appears Friday. He can be reached at www.gettingtechnical.com on the Internet.

Source: Toronto Star

(CEP News) – The EUR/USD is just off session lows of 1.4561 after a 0.0076 drop on reports that there is an agreement between the Democrats and Republicans on the framework of the financial sector bailout.

The euro has since partially pared those losses and is now down 0.0025 to 1.4597 against the dollar.

National Bank of Canada director of FX George Androulidakis said in an interview he is expecting the announcement of the bailout to be dollar positive in initial reaction but midterm it could be dollar negative as the plan could lead to rising inflation. As for the plan not passing, Androulidakis said that just isn’t an option right now.

“The dollar is up because there is positive sentiment in Wall Street,” he said. “I think right now it has to be dollar positive because the alternative would be dollar and economic negative.”

Looking at trading ranges, Androulidakis said with the recent moves coming there is a fairly wide trading range in the EUR/USD. He said he will be focused on resistance of 1.4950 USD and support at 1.4550 USD. Citigroup FX strategists are advising clients to go short on the EUR/USD on any signs of strength up to 1.5000.

“For now, we are retaining our 1.3500 target that lies between 2 key Fibonacci levels on the weekly chart,” they wrote. “However, market weakness has the distinct potential to take price action into the 1.3000 / 1.3300 support area, which includes an important psychological level (1.3000), and 2 important Fibonacci levels (weekly 61.8% target: 1.3312; monthly 38.2% target: 1.3192).”

The greenback is generally mixed in the foreign exchange market. The U.S. dollar is up 0.77 to 106.88 against the yen and down 0.0040 to 1.0347 against the Canadian dollar. …Continued

Source: CEP News

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Posted By:Daryl Guppy
(excerpted)

People aren’t exactly trading rationally right now — evident in the large session to session index swings. Fear and uncertainty are driving the markets. So, are charts reliable in these volatile times?

The answer to this is very simply, yes. Chart analysis is reliable, and provides effective trading and investment solutions, basically when to enter and when to exit trades in a tight timeframe.

Charting provides three important advantages.

First, it objectively records the market’s view and opinion of a stock created by those who buy and sell. Opinions backed by money are the key factors here. The collapse of Lehman Brothers and AIG is not a surprise.

Their charts have shown a steady, prolonged, severe downtrend for the past nine months. The contradiction between company announcements –we do not have a problem — and the chart trend which showed significant problems, highlights the objectivity. The charts told the real story that was only later revealed.

The second advantage, is the way charts capture the psychological behavior of investors and traders. This can be directly observed on a chart — its support and resistance levels, and trending behavior. When markets fall, they pause at previous support levels. When markets rebound, the rally is capped at previous resistance levels. These levels are created by the aggregate behavior of individual investors.

These psychological behavioral reactions are further analyzed using technical analysis methods designed to isolate psychological behavioral patterns.

We use the Guppy Multiple Moving Averages (GMMA) analysis to understand investor and trader thinking. A small number of chart patterns highlight the behavior probability of market participants. These include the head and shoulder pattern seen on the Dow. (GMMA analysis is different from some technical analysis methods which try to use the statistical behavior of the market to identify turning points in advance)

The third chart advantage, is the analysis of short-term price movements to understand the limitations and behavior of price volatility. In the current situation, we use a GMMA Trend Volatility Line analysis to improve entry and exit conditions for intraday and short-term trading. This targets momentum, highlighting significant price moves.

Source: CNBC

Watch the Video

We are the government, we’re here to help.

I believe the only help the government gave us last week was pushing gold prices higher. During last week’s massive bailout and intervention in the credit markets one of the few markets to close higher for the week was gold. This tells you a tremendous amount about how traders are thinking about the future.

These are extraordinary times we are living in, and we have to take advantage of what the markets are offering us at the moment. The fact that there was no follow-through today in the equity markets tells me that there’s so many questions about this bailout that are yet to be ironed out. That in turn creates more uneasiness in the marketplace.

I still believe that stocks are in a bear market and that we can see a trade down to the 10,000 level basis the DOW. Having said that, I would be trading gold from the long side until our “Trade Triangle” Technology points to a change in trend direction. With the t echnicals all in place, and the fundamentals certainly pointing to higher gold prices, I think traders should be looking at this market from the long side. Some of our cyclic work indicates that gold could be strong until February or March of 2009.

Enjoy the video. It’s short and it’s available now with our compliments.

Every success trading,

Adam Hewison
President, INO.com
Co Creator, MarketClub.com