Richard Suttmeier is the Chief Market Strategist at www.ValuEngine.com.

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May 13, 2010 – Complacency Returns to the Stock Market, while Risk Aversion Continues

Mortgage Applications Rise, but not for Purchases. Financial Reform seems to be getting
watered down. I provide a Score Card for the major averages. Risk Aversion Remains in Place.
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 and Freddie Mac 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
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, which 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 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

That’s today’s Four in Four. Have a great day.

Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com
(800) 381-5576
As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I
have daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters as
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“I Hold No Positions in the Stocks I Cover.”