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Alcoa earnings after close

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Housing Starts

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FOMC Minutes

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Initial Jobless Claims

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Friday:

Consumer Sentiment

Euro Watch

Turns out Europe is not as united as first though.  Finland, the Netherlands, and perhaps Germany looking to strike back against the new bailout measures for the PIIGS.  Late last week was the first time Finish and Dutch officials voiced their dissent, will it carry through?

Red Flags Across The Pond?  No, The Other Pond!

Which world country has the highest debt to GDP ratio?  Let me throw out some choices.  Greece, obviously, Portugal, Italy, and Spain.  That’s where all the news is anyway.

Actually, it is Japan, and by a long shot.  Yes, I am talking about the world’s third largest economy.  Here are the top five debtor nations, in terms of debt to GDP.  Bear in mind, a level above 90% is considered to be a problem.

So why is the world not giving Japan the same treatment as the PIGS?  Why are their bond yields so low, and why is no one talking about it?  First, they do not face the same issue as the European debtors, which is a unified monetary policy, without a unified fiscal policy, so they may manipulate interest rates as much as we have in the United States.  Secondly, Japan is still growing in terms of GDP, and debtors usually use the knowledge of a growing economy as indication of good credit.

Regardless, even though it is still a non-issue at the present, Japan is a fuse waiting to be ignited.  If there is anything that could light this fuse I believe it would be public attention.  If world credit worthiness and growth continues contracting, a single downgrade of Japan’s bonds could trigger a cascade of attention and panic that would dwarf Greece’s crisis.

So, if the world does not care, when will they?  Japan has made the mistake of front loading their debt.  That is, over 85% of their debt comes due in the next ten years.  The greatest bulk is due before 2015, so we should expect public scrutiny of the situation to occur before that time.

CQCA Business Research

Until then, let’s wait, and hope we never reach that point.

Trade Of The Week – Betting Against Asset Managers

In general, asset management firms perform pretty well in a bull market.  Even if they underperform the market, clients still come, and commissions are still made.

However, once the bears are in control, finance and asset management firms are turned upside down, with layoffs, decreased commissions, and unhappy customers leaving for other managers.

Waddell & Reed Financial (WDR) has been underperforming the finance sector as a whole since early 2011, and is tracing out a massive consolidation that could put the stock in the single digits by the end of this bear market.  An easy to borrow stock, I suggest preparing to short it.

Our outlook for the broad market says that a large bear thrust will begin any minute, so we would advise beginning to pyramid into WDR shorts as soon as possible.  Perhaps a half position now around $30.00, a stop around $31.50, and enter the rest of the trade once under $23.50.

As a side note.  My analysis is showing a cyclical confluence around July 13.  What direction will the market turn?  No idea yet, but keep that date in mind when trading.

When I make these kind of projections, so far away from the price, I tend to receive eyebrow raising.  My “crazy” call before this was for JPM to drop below $22.  That was when the stock was at $37.  Some ask if I understand the implications of stocks moving this far down.  Yes, I do, and trust me, I believe the bear market starting in 2000 is not even close to its end, or its worst.

The Market Timer

In the second issue, we mentioned the major cyclical confluence around July 17-19.  At this point, we are less than two weeks from there.  We expect the direction going into that cyclical low to be down, so expect a sharp upward retracement immediately after those dates.

The target for then jumps out as a minumum immediate decline to the 1310 level on the S & P 500.  Everything is contingent on the market’s direction into tomorrow.  The market is still in an upward correction until the level of 1335 is broken.  After that, an active major target (that means confluence zone) of 1133 is expected by summer’s end.  After we reach that level, expect a relief rally to at least 1230 before any further decline.  Notice how the recent upswing hit resistance right on the edge of the Fibonacci arc at the 61.8% retracement.

On a short term basis, the next pivot occurs tomorrow morning at around 11 AM.  If the direction of the market is up tomorrow morning… well, expect an ugly decline.

I’ll have my hourly pivot for next week in next Sunday’s newsletter.  For now, July 17-19 is the best I can do.

Bottom line:  We have enough room for one more rally, but the highest probability scenario is a swift decline.  Be careful.

Happy trading!

~Christopher Diodato