Dallas, TX
May 14, 2010, 08:00 EST		 Dr. Joe Duarte's Market I.Q.


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Day 5: Eurozone Troubles And Technical Failures In U.S.
What's Hot Today:

U.S. stock index futures were heading lower on Friday. The Euro fell below 1.25, setting up the potential for all kinds of crazy things happening.

News For Thought

Government to regulate ratings agencies. According to The Wall Street Journal: "The Senate voted for a provision that would thrust the government into the process of determining who rates complex bond deals, in a move to end alleged conflicts of interest blamed by some for worsening the financial crisis."

Italy: Its problem is that it has more debt than any country in Europe. According to The Wall Street Journal: Europe's nearly trillion-dollar rescue fund has eased the economic pressure on nations at the euro-zone's periphery, but a deeper problem is making it difficult for those countries to escape their huge debts—a lack of growth. The problem is a particular concern for Italy, Europe's most heavily indebted country." The Journal added: "So far, markets have deemed Italy less risky than other Southern European nations despite a public debt equivalent to 115% of gross domestic product—about the same as Greece. On Thursday Italy had to pay almost one percentage point more than Germany to borrow, about the same as Spain, and lower than Greece's spread of 4.65 percentage points. But the stakes in a potential Italian debt crisis are much larger. Italy's outstanding public debt is €1.7 trillion, seven times the size of Greece's."

Drug cartel leader's wife arrested. According to Stratfor.com: "The Mexican military and Federal Police detained Griselda Lopez Perez, the wife of Sinaloa Federation leader Joaquin “El Chapo” Guzman Loera, on May 12 in operations against several of the kingpin’s suspected properties in Culiacan, Sinaloa state, a spokeswoman for Joint Operation Culiacan-Navolato said. Lopez was immediately flown to Mexico City on a chartered Federal Attorney General flight, a typical response for high-value targets related to organized crime. It is unclear what, if any, charges will be brought against Lopez, but her relationship with the world’s second-most-wanted man certainly makes her a person of interest and one that could provide valuable intelligence as to the whereabouts and movements of the elusive Sinaloa leader. Lopez is the mother of four of Guzman’s children, including the deceased Edgar Guzman Lopez, who was killed in a Los Zetas ambush in May 2008 in Culiacan. The intelligence gathered from properties reportedly belonging to Guzman likely will result in further operations and possible high-profile arrests."

Day 5: Eurozone Troubles And Technical Failures In U.S.
Currency Markets Regain Focal Point Status
We've been working on the notion that it takes 4 to 5 days after a rally attempt starts to know whether it's going to stick. And if day 4 in the U.S. was any indication of what lies ahead, this market is more likely to fall than to rise from here.

We started measuring the rally on May 10, when the stock market bounced two days after the intraday 1000 point Dow Jones decline on May 6. That decline seems to have been caused by multiple factors, with the most influencial, as far as anyone can tell right now, being an options trade put on by a hedge fund, which triggered a chain reaction in the linked futures and equity markets. But the market recovered, as the program traders brought things back. And by May 7, we had the start of a rally attempt.



Chart Courtesy of StockCharts.com


So, where are we? The small stocks had been acting better than the big stocks. But the Russell 2000 index of small socks (RUT), even though it bounced back better than the S & P 500, also had trouble on Thursday, and is not likely to buck the overall market's trend.



Chart Courtesy of StockCharts.com


The S & P 500 (SPX) has failed three times in a row, May 11, 12, and 13, to rise above its 50-day moving average. The 20-day moving average (green line) has also turned lower, suggesting that the short term trend has turned down and that selling pressure is increasing. If the 20-day moving average crosses below the 50-day moving average, that will be another negative development. And if the 50-day average rolls over and starts heading lower, even more selling pressure will hit stocks.



Chart Courtesy of StockCharts.com


This brings us to the centerpiece of the current global markets, the action in the Euro (XEU). The European currency broke below 1.25 to the dollar (USD) below. The dollar hit a new high for this move on May 13, showing increasing strength. According to The Wall Street Journal, the Euro's recent decline is based on trader fears of "on fears of public unrest in the euro zone and on growing concern over the credibility of the European Central Bank." It's that second part that is of more concern from a market standpoint. To be sure, violence and the potential for more deaths during demonstrations is deplorable. But from a market standpoint, when a central bank loses credibility, the currency that the central bank in question represents will usually get trashed.



Chart Courtesy of StockCharts.com


One of the most reliable indicators in this rally has been the NYSE advance decline line (NYAD). The AD Line made a triple top in late April, early May, a move that proved to be very prescient in its ability to predict the market's vulnerability. This indicator has recovered, but is still not at a place where you could make big bets on its current appearance. What's safe to day is that a couple of more good days are likely to return it to where it will have turned positive again.



Chart Courtesy of StockCharts.com


Finally, we look at the NYSE advance decline line (NYAD). This highly reliable indicator over the last several months is telling us that this rally, barring a significant improvement, is just about done, and that some sort of correction is the most likely short to intermediate term move in the market. The AD line rolled over on Thursday after failing to recoup what was left of its lost ground on Thursday.

Conclusion

Friday could be a tough day for those on the wrong side of the trade. Our ratings lists have thinned out over the last couple of weeks and the ratings on a select short selling ETFs have remained unchanged. The message is clear. The long side is starting to be a difficult trade, while the short side is a bit easier.

We follow the trend. And at this point, it seems as if the trend is changing. These things take time, so it could be a few more days before it's all clear. But for now, caution is the best of all strategies.

We'll be on Twitter some time today before the market closes with some updated comments.

Know when to sell and how to make money when the market falls. Get a detailed trading plan in your pocket. Read Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for All Seasons. Also Available As Kindle Books.

 

Market Moves - Stock Of The Day
The Currency Shares Eurotrust ETF (NYSE: FXE) Broke Below 1.25
The Currency Shares Eurotrust ETF (NYSE: FXE) broke below the 1.25 area to the dollar overnight, with the impact being felt across all markets.



Chart Courtesy of StockCharts.com


Asian markets ended negative. European markets reversed, giving up the prior day's gains. And the dollar strengthened, making new highs on the U.S. dollar index.

If you look at the news, social unrest is starting to spread. There is big trouble in Thailand. The number of strikes in Europe is starting to increase. The potential for violence is increasing

We believe that this is a significant development. And here's why. Most stocks investors rarely pay attention to the currency markets. We think that's a mistake, given the amount of money that is traded in the currency market on a daily basis, and the influence those trades can have on all markets.

If you look at history, some of the biggest market declines have come from currency problems. In 1997 we had the Thai Bhat debacle, which coined the word, "contagion." Long Term Capital Management, a hedge fund run by Nobel Prize winning types lost its shirt on weird options based on currency bets that went wrong. And the Fed, Goldman Sachs, and the usual cast bailed them out.

A year later, Russia defaulted, and we had another currency related crisis. This time around we have the Euro, which is even more important in scope.

Greece was just the tip of the iceberg. There is Italy, Ireland, Spain, Portugal, California, New Jersey, Nevada, Illinois, and other large economies with budget deficits and real estate related problems out there. There is a generally poor collection of policy makers in power everywhere, with little knowledge of how the world's economy really works. And they are mostly driven by ideology, much of it leaning left toward policies that have been proven to be faulty time after time.

So, in our view, everything that could go wrong has the potential of going wrong. Bad economies, bad policies, and really bad problems that are difficult to fix.

That's why the Euro breaking below 1.25 is important. If if it sticks, and the Euro goes even lower, it's a sign that people are losing confidence in Europe, because it's, in their view, not fixable under the current system or set of policies.

Think about that for a while before you make any big bets this weekend.

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