Traders Edge Blog

There Goes a Wheel…

Swing and a miss. Nope, I’m not talking bout the World Series, given that my beloved Yanks are sitting at home after a dispiriting butt-kickin delivered by da Tigas.

No, that would be the sound of earnings disappointments that have come down the pike so far—none bigger than yesterday’s little fiasco sponsored by Apple. Now I’m not here to boo hoo or beat on AAPL or to tell ya Armageddon is finally upon us.

Truth is what we are seeing is nothing more than the inevitable—bad numbers reflective of a bad global economy. Not exactly breaking news that Wall Street and public companies have been playing hide-the-ball for quite some time now, providing an illusion that things are well and improving on the corporate front.

Not that anyone bought into the quarterly cycle of dumbed-down expectations that companies would invariably beat, enabling the collective mass to preen. Corporate America has been slashing its way to profitability throughout this entire meltdown episode. Nothing wrong with that…that is what you do during bad times.

But at some point ya have to have real spending and real growth in economic activity or the wheels fall off. Which is where we find ourselves now—companies are failing to meet or beat even the taken-down numbers served up by Wall Street.

The good news though is this isn’t really a bad thing or a signal that the wheels are indeed falling off. Corporations are sitting on hoards of cash and operating in lean/mean fashion, ready to really ramp it up when the economy does start to chug into higher gear again.

Yeah, slow growth is here to stay for a while, evidenced by the 2 percent number released this morning, but the fact is we are holding our own… and with each passing day, week and month we are closer to the end of this mess than the beginning. This notion has been and remains reflected in the main broad indices here. Despite the recent swoon that has seen retracement action across the market, neither the INDU nor the SPX has experienced any real damage or violated key levels that would give cause for concern.

Both indices remain poised mid-channel in their respective channels formed off the ’09 lows. Both sit just above pretty critical support levels. And both have sold off a good clip in the past couple weeks, so they are probably due for a bounce. This is a likely turning point and were both indices to hold and turn up, they’d be right back into upside tests of levels previously detailed. Were that to occur, the focus would again turn to the fact the broad markets here are on the verge of their all-time record highs…voila, everything hunky dory.

Then again, violation of these key support levels and we are probably set up for a trip to the lower half of the respective channels, which could easily see the INDU back to a test of 12K (actually below) and the SPX defending 1,200 or thereabouts.

For now, we remained firmly entrenched in long-standing channels and not much has changed. The coiling action continues to build energy and we remain set-up for what looks more-and-more like some sort of a decisive resolution near-term.

One last point to ponder is the fact we have now come to the end of what are normally dicey months for the market and are set to enter what are typically market-friendly months. Take that for what you will, but when combined with the fact that we are now well into a horrible earnings season—yet we remain within relatively easy distance of record levels…. Who knows what any of that means…

K, I’ll toss out one quick thought—maybe the wheels aren’t gonna fall off…we may just need a couple cans of fix-a-flat to make things right at this point…

I’m not guessing either way…simply gonna hold tight, let the story unfold and react accordingly…just as planned…

Should be interesting!

~LH

Serving Up a Black Eye?

Well, another week, another debate, more mixed signals and the seemingly inevitable crash I referred to last week finally came to pass…

Aaahh, scratch that. No crash… I did say color me skeptical at that time…and quite a bit more. Truth is that despite the myriad headwinds and legitimate reasons this market should turn tail and head south, I’ve been hesitant to buy into such a notion, primarily because price action ain’t pointing to such a move…just yet.

As explained in my last several posts and the newsletter, the broad indices have factored and discounted an awful lot of bad news… Given that simple fact, some (myself included) give great deference to the argument that the relative strength of the major indices is itself a signal the markets are looking ahead and forecasting the real possibility of better times.

Not for me to say or guess…I’m simply looking at price action, as is my norm. From that standpoint, the market does appear to be hinting at a northerly trek. But as any trader that’s been around for a good clip of time will tell ya, this is exactly the point where epic reversals occur.

Many unknowns to be sure, but what can be stated with confidence is the fact that the market has effectively held up remarkable well as its navigated some pretty serious minefields during what has traditionally been a difficult season—September through October. The INDU has basically side-winded in a relatively tight range—13,300 to 13,660—and presently sits near the top of that range.

Moreover, the INDU sits within spittin distance of its 2007 all-time high of 14,165. Since clearing its May high back in September—an event many interpreted as a buy signal in Dow Theor —hoards of bulls have predicted an assault on the all-time mark and consider recent activity as nothing more than consolidation before a new bull leg forms to set new highs.

On the flipside, there is a sizable group of traders who have remained leery of the long side of the market. While most admit that both the INDU and SPX are showing pretty decent strength, they sense something amiss below the surface. One of the chief standard-bearers of that group is Richard Russell, the founder and editor of the Dow Theory Letters.

Now it’s fair to say that Russell has been known to be a wee bit bearish over the years…Okay, maybe “wee bit” is a little understated….he’s called as recently as this year for a correction that will prove greater than any ever experienced. Now before you roll your eyes and label him a crackpot, it’s worth noting that he’s been publishing the DTL since ’58 and has seen just about everything…and certainly much more than just about any living participant in the market. And he’s proven right a pretty fair amount of the time…and not so right a fair amount as well.

This year in particular Russell has been sounding the alarm for a slew of legitimate reasons related to our debt structure, economy, market valuations, European and Chinese situations, etc. He actually instructed his clients to go to Gold early in the year.

More recent and relevant to our discussion is the fact he’s warned that the September upside break on the part of the Dow was a bogus buy trigger that would likely prove to be a trap for bulls. His primary reasoning was (and remains) the fact that the Dow Transports failed to top their highs from early in the year. Indeed, the Transport chart has been anything but reassuring, with a series of failed rallies and lower highs dating to early in the year.

Russell is not alone in his fretting over the failure of the transports to confirm the upside break on the part of the INDU—most Dow theorists prescribe to the same notion and many have voiced concerns this market may still decline sharply if confirmation doesn’t occur soon.

Well, whatever your thoughts on Russell and those likeminded, the fact is the Transports are starting to get interesting. After yet another nasty swoon in September, October has seen the group trade back up to challenge a strong downtrend-line that formed off the 2011 highs and has since held firmly to quash each attempted rally.

Might we simply be looking at another failed attempt this time around? Most certainly so… But there is an added element this time around that is worth noting—good ol’ Federal Express. The worldwide delivery company is considered by many to be a bell-weather on the global economy and markets. And it’s a major component of the Transports.

A quick gander at the map tells us that Fed Ex is suddenly looking rather froggy:

The company actually reported lousy numbers a month ago and took down their earnings forecast for 2012. Equally gloomy was the fact they cast a dark shadow on biz the world over in their forward forecast. The stock and the market as a whole dropped in the wake of their forecast. Since that time FDX has developed some serious legs and managed to break above a down-trendline dating to 2007—it’s now challenging nearer-term resistance.

If…big if…If FDX does manage an upside break, the Transports will surely go. This would be seen by lots of peeps as the long-awaited confirmation the U.S. broad indices are gonna take off. Factor the market- friendly months of November and December—voila, you have the makings of a year-ending party…at least in the eyes of the bulls.

So, what’s the takeaway? A whole bunch of “ifs.”

Then again, maybe there is crack of light in this tunnel. It’s worth leaving you with this little tidbit. Just yesterday Russell came out in his “site notes” talking bout the notion that the Dow Theory might be poised to take a “black eye.” He lamented that his call on the markets might well prove to be wrong; actually going so far as to admit that a set of proprietary indicators he’s long-used and trusted have signaled an upside move in the markets, despite the fact the Transports have failed to confirm a Dow buy signal.

What’s to make of all this? Dunno – but one can’t help but get the sense we are on the verge of something decisive…time will tell!

~LH