Stockscom Report for Mar 13/11
Market Synopsis.

The earthquake that hit Japan was a changing moment for Japan and its effects will be felt around the world.

The sheer amount of destruction necessitates a rebuilding program that will endure for several years. One of the effects of this rebuilding was felt immediately as the yen soared on Friday in recognition of the tremendous scale of yen repatriation that will take place as Japanese companies seek to liquidate their near-cash investments and convert the proceeds to yen in order to pay for the reparations needed. In overnight trading this evening, the yen leaped higher however the BOJ appears to have sold yen in an effort to stem the rise as they rightfully fear an expensive yen would be a massive hindrance to Japanese exports at the exact moment when Japan would need to sell more exports.

This is the early stage of the aftermath of the earthquake thus emergency procedures and rescues continue unabated with other parts of the country organizing efforts to get aid to the affected regions. However the regions less affected must come to grips with other problems that include distribution of goods and services, electricity supply (and importantly, the intrinsically connected water supply) and factory shutdowns that are the result of upstream production problems in the hardest hit areas. In some cases the actually suppliers’ factories were spared any damage however the damage to the transportation network and infrastructure are large enough to impede the movement of goods.

One quarter of Japan’s electricity supply comes from nuclear energy and the extensive damage to the nuclear power plants north of Tokyo remains a huge question mark. The water damage sustained by the reactors has elevated the risk of reactor meltdown and consequently this has concentrated their focus on finding solutions and averting further disasters. And with the significant reduction in electricity, the country must now contend with rolling blackouts in order to reduce consumption. Meanwhile the shortage of nuclear energy will mean an increase in the import of natural gas and oil, which will subsequently apply upward pressure on global prices for these commodities.

Growth in Japan had stalled recently and the economy contracted in the fourth quarter of 2010. The destruction that occurred ensures that recession will continue and indeed worsen as economic activity stagnates with the certain loss of production. In some cases, the impact will be felt around the world as prices for such items as computer chips rise due to the contraction in supply. Japan is the source for approximately 40% of the memory chips used in smartphones and tablet computers.

One impact that could have serious repercussions in the US is the Japanese government’s future need for capital to finance the reconstruction. There is a potential that Japan will be forced to start selling their massive volume of US treasuries (contributing not the least to a rise in the price of yen upon conversion from dollars) and cause the US to seek out new buyers of US treasuries to replace these faithful borrowers incurring the risk of an increase in interest rates. The Japanese held almost $900 billion at the end of 2010 but as mentioned, selling any or all of this would ensure a rise in the value of the yen, which the Japanese cannot even contemplate at this point.

Technically Speaking

All four major markets closed this week with losses from 1% on the Dow Jones Industrials to 2.6% on the ND-100 index. The broader markets clearly outperformed the tech sector, which has been weighed down recently by the semiconductor sub-index.

On the weekly charts, the key factor is the slide in the previously overbought stochastics, a condition that was the source of much concern and many comments over the past few weeks as we anticipated some breakdown of the overbought nature of the markets. Now we are seeing that stochastics are likely to tumble into oversold territory before any firm rebound gains a footing. With the rising 25-week moving average approaching current prices, it stands to reason that support here would be critical for bulls’ confidence.

Trading volume for the week was roughly similar to lower than the week before and this too supports the notion that this slide represents nothing more than a correction that needs time to resolve.

Trading volumes on the daily charts have declined noticeably over the last several weeks as this retracement became more entrenched. More importantly however is the remarkable division between up days and down days where down days have significantly higher volumes traded. But this difference still has not been sufficiently large enough to alter the underlying bullish condition of the market.

On the tech side, the Nasdaq twins have slid through their respective 50-day moving averages and are now indicating that a test of their 100-day MA’s is imminent. Stochastics are quickly moving into oversold territory, a situation that is hardly tenable for a long period of time however a rebound here is unlikely to gain much traction either.

In the broader sector, the indices appear for the moment, to have found support at their respective 50-day MA’s but stochastics have more room to fall before becoming oversold, which could undermine this support.

Gold

Gold closed fractionally lower this week after several weeks of steady gains and despite the slide, volumes were markedly lower for most of the major producers as well as the gold ETF, GLD. Considering the gains that were seen, it is not unusual to see substantial retracement as longs move to the sidelines at the same time as stochastics reach oversold tensions.

We watch the MACD charts on the weeklies for some early indication of turns occurring and certainly in the cases of GLD and GG, there is evidence of a start to turn upward. This turn though could take several weeks before we can safely determine whether it is in fact, reliable.

Trading volumes on the daily chart were skewed significantly toward the sellers as volume on down days easily exceeded the volume on up days. For many companies, the only up day for the week was actually Friday, an action that can only be construed as a rebound from oversold tensions after a string of declines.

Gold is being subjected to conflicting forces at this moment as sellers face off against those seeking the security of an alternative currency. Having added the current situation surrounding the Middle East and North Africa region with the enormous earthquake that hit Japan, this tremendous uncertainty in real world events coupled with the decline in stocks compels us to maintain positions in gold.