Market Overview: Complacency Returns, Risk Aversion Continues

Richard Suttmeier submits: Mortgage applications rise, but not for purchases: US mortgage applications rose last week on increased demand for refinancings. Demand for loans to purchase a home declined during the first week after the expiration of the home buyer tax credits which occurred on April 30. These contracts must close by the end of June 30 to get the $8,000 for first time buyers and $6,500 for those who are moving from an existing home. This could become an issue particularly if an existing buyer cannot sell their current home before June 30. It will be interesting to see how many homebuyers not only miss getting the tax credit, but also lose down payments by walking away from an unclosed deal. Financial Reform seems to be getting watered down. The Senate defeated an amendment proposed by Republicans to take Fannie Mae (FNM) and Freddie Mac (FRE) out of conservatorship within two years. Will the Democrats extend the costs to taxpayers beyond 2012? This is highly likely as the unused lines of credit from the original $200 billion for each GSE will still be in effect after 2012. This will result in a total cost to taxpayers that could be well above $400 billion for both GSEs combined. Would you believe that the Senate faces nearly 200 amendments still pending consideration? At the end of 2012 the line of credit for Fannie Mae will be all losses since Q3 2009 plus the unused $140 billion from the $200 billion Conservatorship line. For Freddie Mac the line will be their unused $149 billion from their $200 billion. Since the end of Q3 2009 Fannie Mae tapped the Treasury for $23.3 billion and Freddie Mac for $19.6 billion. The FDIC is getting creative wanting member banks to draft “living wills”. These plans would affect the forty largest banks and consist of each bank’s own plan to liquidate in the event of financial stress. Complacency returns to the Stock Market, while risk aversion continues: Most of the stocks I graphed so far this week are back above their May 6 high, which is a sign of complacency as stocks leap back on the “wall of worry”. The bulls say ignore the 1000 points of light called the “Flash Crash.” I have said embrace that type of volatility as they are buying opportunities and I am a bear. Investors need to learn how to take advantage of days like last Thursday: This can be done by keeping GTC orders to buy weakness to their next buy level. It's that simple. For example you could have bought Intel (INTC) at its 200-week simple moving average at $20.20. Instead, most bullish strategists have that "deer in the headlights" approach. Why do the bulls always buy high then sell low? Here’s a Score Card for the major averages

• The Dow saw a high of 10,880 at the May 6th high, with 50-day simple moving average at 10,862. The Dow closed above this band on Wednesday.
• The S&P 500 retested its May 6 high at 1168 with the 50-day simple moving average a barrier at 1173. SPX closed between these levels on Wednesday.
• The NASDAQ ended Wednesday above its May 6 high at 2408 and its 50-day simple moving average at 2417.
• Dow Transports is the upside leader trading well above its May 6 high of 4580.
• The Russell 2000 is also above its May 6 high of 700.89.
• The SOX is also above its May 6 high of 368.35 and traded above its 50-day simple moving average at 371.62.
• Even with this complacency, the upside is limited to the April 26th highs where sectors become extremely overvalued with the Dow up against its 61.8% retracement of the decline from its October 2007 high and the March 6, 2009 low.
• "Dow 8,500 before Dow 11,500” remains my call.

Risk Aversion Remains in Place: US Treasury yields are still low. Gold set a new all time high as “currency of last resort.” Crude oil is down with the euro. The 10-Year US Treasury Auction – This was an OK auction for this $28 billion issue. The winning bid was 3.548, but you could buy it cheaper after the auction. The bid to cover was a solid 2.96 times the auctioned amount. The indirect bid was strong at 42%, which is above my 30% to 40% neutral zone. My semiannual pivot remains support at 3.675 with my quarterly pivot as resistance at 3.467.Courtesy of Thomson / Reuters Today’s focus is the $16 billion in 30-Year bonds – My semiannual pivot is 4.543 with my quarterly risky level at 4.026. The May 6th low yield was 4.056. Comex Gold held my semiannual pivot at $1186.5, which is a key to the scenario calling gold “the currency of last resort.” My weekly pivot is $1206.7 with a monthly pivot at $1217.3 and monthly resistance at $1270.1.Courtesy of Thomson / Reuters Nymex Crude Oil is below its 200-week simple moving average at $76.79 and my annual pivot at $77.05. Quarterly supports are $68.03 and $58.51 with weekly and monthly resistances at $82.15 and $88.53. The lack of a rally in crude oil questions the global growth story.Courtesy of Thomson / Reuters Weekly Dow: The Dow ended last week below its 200-week simple moving average at 11,130, after testing the 61.8% Fibonacci Retracement of the October 2007 to March 2009 low at 11,246 with the April 26th high at 11,258. MOJO is now rolling over and will likely end the week declining out of overbought territory. A weekly close below the 5-week modified moving average at 10,799 shifts the weekly chart profile to negative. My annual pivot is 11,235 with monthly and semiannual resistances at 11,274 and 11,442. I still predict Dow 8,500 before Dow 11,500.Courtesy of Thomson / Reuters Disclosure: No PositionsComplete Story »