Japan – A Curious Conundrum Tuesday, Oct 12 2010 

I apologize for the lack of posts over the past few days but the move made by the markets last week has drawn more than a passing interest and caused me to delve into deep thought.

As I mentioned in the Week in Review the move last week by the Bank of Japan to cut interest rates and enact a new quantitative easing program along with the lack of moves by Indonesia and Australia coupled with the immediate rally in equity markets looks increasingly like a coordinated global intervention to push up equity prices to help Japan.

Looking at other Asian markets there is a flood of hot money roaring through these markets like a tsunami. For someone who was and still is bullish on the equity markets I have to take pause here. The Thai Bhat has rallied down below a crucial support level at 30 and there are calls from the business community to help stem the appreciation in the Bhat as this is hurting FDI and exporters just as the political climate is showing signs of stabilization.

This is more than a short-term issue and this flood of money will cause unintended consequences in 2011 as the Asian growth machine continues to lead the world out of the recession.

Strong growth across Asia, ex-Japan, is fueling inflationary worries as increased purchasing power is driving demand in local markets. The increased demand for products is beginning to fuel the flames of inflation.

But there is a thorn in the side of the central banks as they attempt to stomp out inflation before it takes root and that is Japan.

Continued slow economic growth in Japan is hampering efforts by other Asian central banks to stem the flow of hot money into their capital markets.

A rise in interest rates by Asian central banks would risk creating an enormous carry trade between Japan and the other Asian countries possibly adding further to flows of hot money into Asian equity markets.

But what has me most concerned was a simple picture a few weeks ago of a young Japanese woman putting up a poster extolling the virtues of investing in JGB’s. My concern here is twofold. First, as Japan enters into an environment where their aging population must increasingly redeem their JGB’s and foreign capital markets are unlikely to chase yield in Japan the only pool left to tap is the younger generation. By doing so this pulls money that would go into consumption or the Japanese equity markets.

If the younger generation decides to follow in the path of their parents and buy JGB’s it is unlikely that local participation in the equity markets will rise and create a new bull market in Japanese equities. Just as well, consumption figures will remain low and if consumption does not increase then it is likely that deflation will continue well into the future.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

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Technical Commentary – August 23rd Monday, Aug 23 2010 

S&P 500 – The short-term charts look weak but close to oversold levels. This means we could get a short rally next week if economic numbers are not disappointing. We do have a double top at 1130 and another at 1100 and they are resistance levels. The Labor Day holiday will affect trading this week and next with smaller than normal volumes.

On the longer-term charts, the S&P fell below its 50 week moving average (1100) and was unable to climb above last week, possibly turning it into a resistance level if we are unable to make a move above it in the next few weeks.

The 1100 level is becoming an important psychological barrier for the markets. If we are unable to break through it is likely we move back to the 1050 level and then 1000.

On the weekly chart you can see a clear head and shoulders top tracing itself out. Right shoulders can drag themselves out for sometime so this may take a bit longer than expected to resolve itself.

It is not a pretty chart but 1000 will provide a major psychological support level for the market.

NASDAQ – The short-term charts show an index searching for direction after the sharp drop 2 weeks ago. We seem to be rattling around between 2225 and 2160. Just like the S&P we may see a short rally next week with the Labor Day holiday.

The longer-term charts are once again telling the story. The weekly charts shows a golden cross with the 50 week moving average oh so slightly above the 200 week moving average but last weeks rally was not able to take us above the 50 week or 200 week moving averages (2237 and 2220 respectively).

More importantly, the head and shoulders top is much more pronounced here than the S&P. Traders are looking at these charts with trepidation.

TSX – Clear downtrend on both the short and long term charts with prices making lower highs and lower lows. The TSX is at the upper boundary of its trading range and seems to be looking for direction.

The 50 week moving average has become a support level at 11622 with moves below being met with buying. If the TSX falls breaks below 11622 we are likely to see a move down to 11000 which would be the lower end of the trading range.

Economic statistics out of the US are likely to guide the Canadian market as investors will worry that a slowdown in the US will filter back to Canada.

Commentary

The US stock market is at a critical level. Economic statistics have been weak signaling a slowdown and there is the potential for 2nd Quarter GDP to eventually come in a full percent lower than first reported. Markets have been pricing in strong economic growth and it appears as though growth will be coming in below forecasts.

In addition, we have a Hindenburg Omen signal which was confirmed on Thursday and Friday of last week. The Hindenburg Omen does not guarantee a crash but it does signal significant underlying weakness in the stock market. If the market does move lower there is a chance some of the charting signals resolve themselves in a manner which will disappoint investors.

This is not a time when investors should be adding to equity positions unless you are using short ETF’s as a hedge. Investors should be on the sidelines waiting for a trend to establish itself and getting cash ready to allocate.

Once again, I am not calling for a crash but investors should be aware of what Mr. Market is telling us. Economic and technical indicators are showing weakness and investors should be on the sidelines until a trend establishes itself.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.