Hints of a Washout Bottom in U.S. Stocks and Euro

The mirage of economic recovery conjured up by our political leaders and a credulous news media dimmed and flickered in the harsh light of reality on Friday, when grim employment figures for May sent stocks into one of their steepest dives of the year. Although 431,000 jobs were added last month, most of the workers were census-takers hired temporarily by the government.  Even that figure evidently was ginned-up, since it appears that many of the workers had been laid off during intervals when there was little to do, only to be rehired later and recounted. But the bottom line for private-sector employment was a paltry 41,000 new hires, the smallest increase since January.

Chart of Euro daily closing prices

Wall Street did not exactly take the news in stride, and the broad averages fell as though the data had caught most traders by surprise. Index futures had head-faked overnight to trap bulls, but by day’s end the blue chip Dow Average was down 323 points.  We would caution bears against becoming overly confident, however, since there are several technical factors coming into alignment that augur a potentially sharp reversal in the broad averages and some important trading vehicles that we track. For one, at Friday’s low of 1059, the E-Mini S&Ps was within 37 points of a longstanding “Hidden Pivot” target of ours at 1022. That’s equivalent to about 300 more points in the Dow, and it could easily be reached this week if sellers continue to hit stocks on Monday morning as they did on Friday.

Bullion ‘Vulnerable’

The euro may also be close to an important turn after having been savaged since mid-April, when the currency hovered just above $1.37. On Friday, heavy selling drove it below 1.20 for the first time since 2005. The precise intraday low on the June Comex contract was 1.1955 — 0.0015 points from our downside target of 1.1940 – so the bottom could already be in.  However, this week’s action is still needed to confirm a bottom, since even a small overshoot of the 1.1940 target or a close below it would imply additional risk all the way down to exactly 1.1717.  A rally in the euro would imply at least a respite for the U.S. dollar, which has pushed steadily higher since December and recently accelerated to the upside. We also see potentially corresponding weakness in bullion prices – silver relatively more so than gold. If you’re interested in a detailed analysis of both but don’t subscribe, consider taking a free week’s trial to Rick’s Picks by clicking here.

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  • gary leibowitz June 7, 2010, 10:55 pm

    Uncanny how the chart pattern is once again aligned with 1930. Combine that with a turn-date (fibonacci) on the 10th and we should see the SPX at 1020 or so.

    It might happen as a double bottom (tues and thurs) which might make more sense if the PPT wants to show a strong bottom.

    In any event I have been very lucky with my puts and calls for the past 2 months. I am expecting a bottom this week followed by a 3 week rally to 1125 – 1140 or so.

    After that it is straight down. This summer should not end on a high note.

    I do wonder if Gold will breakout from here or form a final top? I should have played Gold but can’t get it out of my head that it will not go up in a deflationary cycle.

  • david June 7, 2010, 9:25 pm

    yea good call on bullion!fundamentals are driving bullion ricky

  • Benjamin June 7, 2010, 6:16 pm

    My bet is that the euro will hit that lower target. I can go into all sorts of reasons why, but in the end… just business as usual.

    And hey, look at gold. What a blast-off today! I’ve been reading quite of bit of bearish/uncertain news of late, but the way I see it, longer term H/S pattern is much more noticeable in silver than gold. Whatever happens in the eur/usd, I don’t think gold is going to suffer much. Maybe a bit boring (seemingly) into and through summer, but a major drop is, imv, unlikely. But even if it does, it could take a hammering all the way down to 800s without ruining the overall picture.

    My plan: buy gold to replace gold traded for silver as g/s ratio continues to favor gold.

    &&&&&

    My thoughts nearly exactly, Benjamin. RA

    • Benjamin June 7, 2010, 9:05 pm

      I’ll take that as praise from on higher. And just so you know, you’re high on my list of people that should be read, which includes Antal Fekete and the Daily Bell (an online, Swiss publication). You’re good, Mr. Ackerman, and your daily commentary puts so much into perspective in such a small space!

      @Mario Cavolo…

      China, eh? You know, I can’t think of a better time to think of China, either. To elaborate some on the usual business…

      USD: We know the government is the single, largest and “richest” employer. We know many U.S. citizens are up to their necks in debt. We know it’s not November yet. We know that replacing incumbents isn’t really going to matter all that much at this stage (libertarianism is on the rise, but for from majority). We know many U.S. citizens are up to their necks in debt.

      So I think dollar strength vs the euro would come from that mix of factors. Govt employee pay is high, but personal debt will see much of it back into the bank, where it goes toward purchasing more govt debt. Deflation would persist, so dollar holds or gains.

      EUR/EU: They don’t really want it to fall apart, as that wouldn’t be pleasant news at this stage. So for all that austerity measures will add up, it’ll be the same old, same old. And when you think about it, Europe is further along than we are, which isn’t surprising given that there’s some 700 million people there, and only 300 million here. Their Big Govt is bigger than ours, ie. On the other hand…

      With the possibility of a stronger dollar and a weakening euro… Well, for all that people were talking about a trade war between the U.S. and China last year (abouts), seems it’ll be Europe’s problem. And since I doubt that Europe will be up for it, at a point sooner I believe the euro will reverse course, or perhaps just hold in range. Better to keep the currency stronger, from their standpoint, than to let depreciation force drastic cutbacks in the name of a trade war they can’t win.

      Yeah, all China has to do is devalue to keep lower, and they get all that matters: productive capacity at our expense. We get to buy rope to hang ourselves with. No wonder China recently said “no, no… do not worry!”.

      Eh, Mr. Cavolo? Isn’t rope from China buy one foot, get two yards free?

      PS- I thought this might not jive with your first post, but with unemployment (imv) about to increase in the West, it makes perfect sense. We’ll just keep on not working and firing while governments give in to the majorities that they’ve worked so hard to create over the years… by mainting them for central bank, to whom we’re all enslaved to by debt.

  • fallingman June 7, 2010, 5:47 pm

    Re: Markman…

    I found him to be a very perceptive journalist. Now that he’s running a service, however, it seems to me he’s concluded that he has to engage in hype. He was an uber bull until about a month ago, with a really dismissive tone toward anyone who was clueless enough to be bearish. That marked a very noted change from the more objective and analytical style he used to feature in his writing.

    Now, he doesn’t seem so sure about the new mega bull. Does that mean he’s flexible enough to be objective and change when he gets it wrong, or is he a chameleon, trying to glom on to current sentiment? Dunno. I hate to be too judgmental. It ain’t an easy game to be in, but let’s just say I’m wary. That said, his observation you’ve forwarded is worth noting and thanks for providing it. Like I said, he was a great reporter.

  • Celty June 7, 2010, 3:29 pm

    Whatever happened to jobs being a lagging indicator?
    Pair that with the highest productivity numbers ever recorded for the American worker the past year, and you can understand why companies have not immediately hired all original workers back.
    It’s all about ‘The Toyota Way’ and ‘Lean Processes’.

    &&&&&&&

    FYI, “rising productivity” means nothing to the Austrians unless it can be correlated to a rising standard of living that includes higher wages. You’ve lit upon the reason why the current gains in productivity are worse than meaningless, implying as they do more joblessness and a generally falling standard of living. RA

  • cameroni June 7, 2010, 2:47 pm

    It should be an interesting week. The way employment numbers get goosed sometimes reminds me of ballot box stuffing. It pays to read between the lines.

    Now if I can go just a little off topic for a moment….

    Just as winter was ending I reported here that Canada’s Western prairie Provinces had just experienced the hottest, driest winter on record and that this might bode poorly for grains in the coming year. Especially as the large majority of the crop coming from this part of the world is for export. Canola and wheat crops here, amongst others, can account for 30 to 35% of global supply. What happens in Saskatchewan impacts prices and global grain stocks.

    How things have changed. Since that time it seems it has been raining almost continuously. So much so that only an estimated 50 to 60% of Saskatchewan crops are in the ground and the window for planting is almost closed. The next 10 to 14 days are critical.

    More rain is expected over the coming days. The planting season up here is short as it is but to lose a few weeks means the season can be lost altogether. We have now recorded the wettest spring in all our history. Madness. The media up here were saying this morning that millions of acres may go unseeded. It is just too wet to get the machinery into the fields.

    From drought to drenching. The world is a wild place some times. If you are playing grain futures though this is a good time to be paying attention to the Saskatchewan crop and weather reports.

  • mario cavolo June 7, 2010, 1:55 pm

    This just in from Jon Markman over at Money Morning, whom I don’t know if readers’s here like much or not but seems quite a good piece of info stating … “The broadest measure of U.S. stocks closed May above its critical 12-month average to remain just barely in bull mode. But measures of large-cap companies like the iShares S&P Europe 350 Index (IEV: 31.55 0.00 0.00%), iShares FTSE/Xinhua China 25 Index (FXI: 38.365 0.00 0.00%) and iShares MSCI Emerging Markets Index (EEM: 37.20 0.00 0.00%) closed May below their 12-month averages, a distinction that in the past has delineated the start of a new bear market.”

    If the Euro stabilizes around the 1.18-1.20 mark, that would boost the European economy as the German export pickup has shown…indeed my wife and I are targeting Europe for the next holiday because of the favorable exchange rate, isn’t that the point?…good luck this week all…I can tell you that property market transactions here in China have slowed to a standstill. (that does NOT mean doomsday crash)

    My China Road Trip Report discovering China’s Lake Cuomo for those who might be interested… http://www.mariocavolo.com/?p=819&more=1&c=1&tb=1&pb=1

    Cheers, Mario