STAGFLATION RULES....

FUNDAMENTAL ANALYSIS
The case for STAGFLATION, which I have been talking about for months, recieved all the facts it needed today. Philly Fed Survey turned in terrible along with leading indicators, suggesting that the economy continues to do badly and is expected to continue to be lousy. This, along with yesterday's high inflation numbers, suggests slow growth or zero growth along with rising inflation = STAGFLATION! Investors woke up to this fact after the Philly Fed Survey numbers are released and brought down the market which looked rather strong on the open. I am more and more inclined to believe that this is going to last for a while...

TECHNICAL ANALYSIS
The Dow looked like its going to break the 30MA to upside upon opening but ended way down suggesting that the 30MA resistance is still too strong to be broken. I think a visit to the Jan lows continue to be inevitable.

Stopped By The Almighty 30MA Again...

FUNDAMENTAL ANALYSIS
The market staged an impressive mid-day come back for apparently no fundamental reasons at all. Crude oil remains high, flight to gold continues, headline inflation is way higher than the Fed's expectations... nothing fundamental supports this turnaround at all. In fact, the bearish sentiment during the morning session should have been carried on throughout the day. Clearly, some institutions are beginning to accumulate stocks at these levels. On the economic front, the ugly head of STAGFLATION is becoming more and more real as inflation and slow growth becomes an increasing concern. More rate cuts? I don't think more rate cuts is the way to go anymore as that would only serve to deflate the dollar further, causing higher inflation. What's the point of having more money when your money is fast becoming worthless, right?

TECHNICAL ANALYSIS
Once again the advance of the Dow is stopped by the almighty 30MA resistance level! In fact, the 30MA have stopped the advance of the Dow ever since the great January decline ended! The 30MA line ended the relieve rally on 4 Feb and now threatens to once again beat down the Dow. Interestingly, the Dow doesn't look like its going to give up without a fight this time round and if it should break above the 30MA line on higher volume tomorrow, we could see a nice leg up! Yes, because everyone's thinking that a test of the Jan lows is compulsory before a rebound, that could well be the very reason that stops it from happening at all as investors accumulate before the rebound begins. On the chart pattern basis, the Dow is forming a bearish pennant pattern which signifies a great deal of upside resistance and more room to downside. It is going to be interesting to watch how it unwinds.



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At Last Someone Agrees....

FUNDAMENTAL ANALYSIS
Market sold off today once again as Fed official Charles Plosser confirmed my Stagflation outlook on the economy and suggested that Fed fund rates should not be cut further. If you hit the "stagflation" tag beneathe this post, you can read my previous take on stagflation. In short, stagflation is a complex economic condition where growth is slowing to a still while inflation continues to rise. Indeed, headline inflation numbers have been rising throughout the year! More rate cuts would only mean more inflation while not attacking the problem of credit default at its heart! Furthermore, it does nothing to help the stock markets either! After 125 points rate cut over the past 2 weeks, the stock market's back where it started before the rate cuts! What we need in this economy is a good series of both corporate and individual tax break in order to improve growth and solve the credit default right at its heart! Hey, how about getting rid of the capital gains tax? Well, not only is stagflation a problem, getting a stimulus package out there is a problem as well. With the Senate stimulus package disapproved being 1 vote short, investors are beginning to see how hard it is for any stimulus package to hit the streets with the senate that we now have, adding further pressure to the already dismal sentiments in the market. All in all, those things that actually started this relieve rally are now shaky and investors reacted predictably by taking those votes back from the market. Fundamental outlook continue to be shaky in the US economy as too many plans have been proposed with no real solution and nothing that really addresses every single aspect of this complex economic condition. I still do not see a full scale bullish reversal in the near future.

TECHNICAL ANALYSIS
The Dow followed up on its 370 points ditch with another 65 points drop today. This has kept my technical outlook on the Dow the same as I proposed yesterday... a test of the January lows, failing which, this bear market will be going lower.

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Another Volatile Week Ahead...

Welcome back all of you and thank you for faithfully following my rantings. :)

This is going to be another very volatile week with focus on the Producer Price Index on Tuesday and Consumer Price Index on Wednesday for indications of inflation as well as the jobless claims numbers on Thursday. Friday's options expiration is also certain to add volatility to an already volatile week (see economic calendar).

The market has priced in another 50 basis points cut this time round and that really is forcing the Fed's hands. Uncle Ben, being one of the most repectable economist in the US, knows that recession is cyclical and easy to handle and get out off but hyper inflation is something that will completely destroy the economy. In ancient times, almost every single dynasty and empire collasped due to inflation, not recession. In recent times, severe inflation has forced dramatic changes to the extend of revising the entire currency system. Recessions never have such an impact. Furthermore, the economy looks more like it is going into a STAGFLATION instead of a mere recession or inflation! If the CPI this week continues to turn in higher along with higher jobless claims, the case for a Stagflation will strengthen. What we do know now is that the Goldilock economy that we have enjoyed over the past 7 years is clearly over. A Goldilock economy is an economy that is growing at a healthy rate along with very moderate inflation. Kinda like the ideal case.

On the technical front, the Dow continue to struggle around the August lows over the past few days and does continue to display a lot of bearishness. Under such pessimism, any rally from this point is likely to be a dead cat bounce or what is known more commonly as a bull trap or a fake rally, especially with the breaking of the neckline that I mentioned on Friday. This is the time to be extremely nimble and to trade short term swings using both call options and put options in order to leverage returns on those very small moves. Don't know how to trade options? Let me teach you options trading personally over a 30-day mentoring course!

Soft Earnings Expectation Ahead...

FUNDAMENTAL ANALYSIS
Just as I feared, companies are coming out of their holes one by one to warn of soft earnings ahead. I have been building a case of a possible STAGFLATION over the past few days and these earnings warnings just days ahead of the earnings season further supports that view. Gold also hit a record high of $880 today as inflation fears rises dramatically. Growing inflation fears, sloppy earnings ahead and slowing employment... everything continues to point to the dreaded STAGFLATION. What if the Fed really do cut rates again? Well, it will definitely feed the stock market for a day or two but when the inflation numbers start coming in much higher again follow that, the stock market is going to take back all that gains and go down some more... we have seen that over the past few months now, haven't we?

TECHNICAL ANALYSIS
The Dow was so extremely weak today that the November low failed to provide any support at all! Rather than go up a little to test the 30WMA before falling down the cliff, it is jumping right off the cliff right now! I am going to look at the Aug lows at about 12517 for some support, otherwise, this market is cooked! That being said, with such a panic and the total equity put call ratio surging into put options, it is not surprising to see that reaction rally up to the 30WMA over the next few days. Stock Options traders might want to make sure your aggregate options delta is negative by now.

STAGFLATION???

FUNDAMENTAL ANALYSIS
With so many analysts out there, including ex-fed chairman Greenspan himself, expecting a recession and other analysts, including myself, expecting rising inflation, Greenspan consolidated all views and suggested that the US economy is really going into a STAGFLATION!

So, what in the world is STAGFLATION?

STAGFLATION is one of the most complex and dangerous economic condition any economy can get into and is characterized by a gradual economic downturn along with rising inflation. In layman terms, STAGFLATION means RECESSION + INFLATION! Wow, how's that for pleasing both camps and stunning investors? In a STAGFLATION economy, neither rate cuts nor rate hikes actually work because rate cuts increase inflation while rate hikes increase the possibility of recession! So, how's that for a sticky situation? I see actual numbers pointing to inflation for months but I have yet to see any actual numbers pointing to an economic downturn. So far, economic growth, productivity and employment has been improving all year long! I am shocked someone as experienced as Greenspan can come out talking about recession one day and then stagflation the very next day. These 2 conditions are VERY different! (lets not even talk about his crazy idea of a full cash bailout of the subprime mess which is going to rocket inflation to the moon!)

TECHNICAL ANALYSIS
The pullback continues today as expected... let's continue to wait for when the turn around happens.