Market Preview 3/9

After a week of hard selling last week, the bears finally backed off on Friday to form a doji. This candle usually signals a reversal so I wouldn't be surprised to see a small bounce to start the week off. None of the bottoming indicators signaled capitulation last week, so I think it would be a small bounce. 740 in the S&P would be the first level of resistance if we make it that far.

S&P 500- Bottoming Indicators
As for the bottoming indicators, we are getting close, but they have not yet signaled a bottom. The most encouraging is the NYSE New Lows. This indicator continued to increase last week and we should see a spike in new lows if we do see capitulation. NYSE Decliners/Advancers also continues to increase, which is what you want to see after an extended downtrend. The McClellan Oscillator and the CPC ratio are also close, but now quite there. Lastly, we still need to see the VIX spike above it's moving average envelope.

I'm not going to get too excited about a bounce from here. If we have a convincing looking up day on Monday, I'll be watching the Price Volume Relationship to see if we have volume to confirm the move. I will most likely add to shorts on a small bounce. If the S&P gets back above 740 then I will reevaluate.

There are no industry groups to get too excited about at this point, excluding Gold Miners. The Retail (XRT) and Agribusiness (MOO) ETF's had been holding up well, but they seem to be breaking down.

The Financials continue to be the worst industry group. I'll continue to short them on rallies back towards resistance. One thing to note however is the talk about removing Mark to Market Accounting. If there is even a whiff that it's actually going to happen the financials are going to take off. Keep tight stops on any short positions.

Gold continues to perform well. It pullback to it's 50 DMA on decreased volume, so I expect the uptrend to continue. I have a position in the GLD, and I may consider the GDX as well.

GLD

One of the reasons I am bullish is because the Dollar is running into some resistance. The Euro and Yen are both nearing support levels while the dollar is closing in on resistance. Below is a monthly chart of the US Dollar.

US Dollar Index

I am also bearish on the dollar because of fundamental reasons. Money supply is increasing at a disturbing pace, and will keep increasing for the foreseeable future. Below is a chart of M2 Money Supply. The Black line shows the overall money supply, while the red line shows the month of month change in M2.

To finish off, I want to touch on some longer term trends I see developing. The first thing I'll note is the Baltic Dry Index.

Baltic Dry Index
This index tracks the rates dry shippers charge, and can be used as a gauge for economic activity. Late last year the index dropped so low that shippers were not evening delivering goods. They were just left sitting idle. Since then rates have gone up which means somebody is starting to ship industrial materials, such as copper, steel, and things of that nature.

Along those same lines, Copper has started to show signs of bottoming. Although I wouldn't commit capital to Copper at this time, it's something to keep an eye on. Like the Baltic Dry Index, Copper prices can be used as a gauge for economic activity.

Copper

Next I want to touch on the debt market. It made big news when the 1 Month T-Bill was auctioned off at a rate of nearly 0%. Since then rates have steadily gone up, signaling increased risk appetite for investors. Below is a chart of the 2 Year Treasury Yield. Conditions in the debt market have improved considerably, while equities continue to fall apart. I look at this as a positive divergence and a leading indicator for equities.

2 Year Treasury Yield
I'm not sure when we'll make a bottom in the equities market. I do know however that global economic activity is improving. I'll be keeping an eye on these things to see if they keep improving.