Wednesday, March 29, 2006

New High in the NASDAQ Comp

We don’t have much time this evening and we will have No time Thursday evening, and no post either, so we thought we would comment on Wednesday’s rally.  We figured we would see a little retracement of Tuesday’s decline but this rally was more than we expected.  The NASDAQ Comp broke its high for the move and did it on significant volume.  The morning rally was strong for about a half an hour from about 10 o’clock central time to about 10:30.  That was the moment that the NASDAQ Comp hit its high point right at 2333.  We traded for a couple of hours at that level before breaking through into the afternoon.  Still, the move was not as strong as it might have been given the enormous top it was breaking through.  After a 15 point up move in the Comp, that index traded down and sideways the rest of the day.  

Our key bearish indicator is the lack of momentum in this rally.  Our other indicators do not confirm this move.  It’s all in the price movement and don’t get me wrong, price movement is a good indicator too.  We just don’t see the technicals backing up this move today.  

There may be some follow through on Thursday but as of tonight there is some reason to believe that may not happen.  GOOG made an announcement after the close that they are planning to sell about $2.1 billion of stock.  We are waiting to see further developments in the market the rest of the week.  We have always indicated that this time of the month, quarter, is usually a strong time due to performance measures for investment managers.  These people have enough power (money) to move the market temporarily and it appears there is very little to stop them.

For that matter, the news out of the Fed on Tuesday was not bullish.  We would mention though that the Fed has not “tightened” in the traditional sense of the word.  Usually, when they decided that they wanted to affect the economy they would drain liquidity from the market.  This doesn’t appear to be the case as the money supply has clearly gone up by large amounts over the past two years while they have been raising rates.  So, what they are doing is raising the cost of borrowing on the short end of the curve but continuing to provide the funds.  The stock market should be going down on all of these fundamentally bearish things but instead there is plenty of money in the system and it seems to have gone into the stock market on Wednesday.

The market is now trading at highs not seen in quite a while.  This does not bode well for us bears.  We plan to maintain our positions even though there seems to be a lot of upside “potential”.  We do not think the rest of this rally will bring much higher prices but you are the captain of your ship.  And we say…

Be careful out there…

[We will try to post some Updates next week but we can’t promise when.  We are committed to posting the week of April 8th.]  

Dow Industrials:  11,215.70  +61.16
RYVNX:   18.00
RYAIX:  21.00
TLT:  87.51
BEGBX:  12.91

Tuesday, March 28, 2006


By now, you know that the Fed raised its key short term lending rate by, yes, 25bps to 4.75%.  The markets kind of did what you would normally expect them to do under the situation.  I say, normally, due to the recent trend of the market not necessarily doing what makes sense.  After the announcement the stock market sold off, bonds sold off more, and the dollar was strong given the prospect of higher rates.  All is good with the world except that the markets response was fairly muted.  

We know that the market has tried to guess what the Fed was going to do with interest rates given whatever news bit came out, bullish if the news was bad and bearish if it was good.  This is not a normal reaction on the part of the market but the market logic seems to be fairly twisted these days.  So, Tuesday’s reaction seems almost contrived.  With the end of the month and quarter right around the corner, we expect the market to make up this lost ground.  

We still believe though that the rally is on borrowed time.  We read with interest an article about the “sell in May and go away” on CNN Money.  The article said that there should be a modest pullback as is normally the case in the second year of a Presidential term.  The article mentioned a pullback of about “12%”, in quotes because when you say about you should probably say about 10% or 15% not about 12%, it sounds too accurate.  While we agree with the general tone of the article and the direction the market will take this year, we disagree with the magnitude of the move.  We think more in terms of About 27.234%...seriously, we do think in terms of 25% for the year or more from these early year highs.  

The market did manage to take out some of the overbought nature on Tuesday as the Dow dropped nearly 100 points on its way back to 11,000 and below.  As more time goes on, we are feeling more and more confident that the high for the year is in place and it’s only a matter of time before the markets correct.  

The only other news on the day was the Conference Board’s Consumer Confidence Index and that showed a remarkable upward adjustment last month.  This report suggests that the consumer is feeling very good and complacency reigns.  These are good indicators to us that the market needs to adjust more than About 12% but we will see.

Be careful out there…

[Reminder: The Update will only be published randomly until April 8th.]  

Dow Industrials:  11,154.54  -95.57
RYVNX:   18.94
RYAIX:  22.19
TLT:  87.93
BEGBX:  12.92

Monday, March 27, 2006

Waiting on the Fed

Monday’s stock market was another dull affair waiting for the Fed’s announcement on Tuesday. The news on Tuesday should provide some spark to trading and we are waiting for the market’s reaction. The stock market has been trying to ascertain the Fed’s intentions with regard to the completion of the interest rate hikes over the past couple of years. The market thinks that the Fed will need to stop soon and therefore thinks that prices will have to go up when the decision is made, and announced.

In order to fully grasp what the market thinks, it is important to view some of the other markets and their views on the Fed’s possible termination of hikes. The dollar is the primary reason for the interest rate hikes in the first place and it will suffer if the perception is that future rate hikes are not in the cards. The beneficiary of an easier Fed would have to be the precious metals and they did have a good day on Monday. Bonds are scared to try to figure out what the Fed is doing.

With the market waiting for the Fed, we must wait also. Monday’s trading gave us little information about future prices. We say, Be Careful out there.

[Editor’s note: The Update may not be published very regularly over the next two weeks. There will definitely be an Update on Tuesday evening after the Fed’s announcement but after that the author’s schedule is a bit unpredictable. Starting on April 8th, the Update will be back to a normal schedule, posting the evening before any trading day.]

Dow Industrials: 11,250.11 -29.86
RYVNX: 18.76
RYAIX: 22.08
TLT: 88.76
BEGBX: 13.00

Sunday, March 26, 2006

New Home Sales Disappoint

In Friday’s market action, we note that GOOG had its up day after being inducted into the SP500, well, the announcement of induction.  We now await the actual induction day, which should also be greeted by a pop in the price of GOOG, although that would be for the purposes of the SP500 index funds to enter the position.  With the GOOG in the news, there is little else to report of any consequence…wait just a minute, that’s not exactly true.  There is the housing report that we saw on Friday morning, too.

For some reason the market seemed to pay attention to that report, due to the fact that the Market seems to think bad news is good news because bad news means the Fed doesn’t have to continue its string of interest rate hikes.  As you know, this is a fickle market and thinks one way on one day and another on the next.  We wouldn’t pretend to think the market knows much of anything at the moment.  We continue to wait but we are of the notion that the current overbought market needs to let some air out.  Back to the housing report…

The housing report should be a flashing red light to anyone paying attention.  What you see just on the surface is powerful enough.  The 10.5% drop in new home sales was the largest in about ten years.  This idea of trading your existing home in for another existing home is one thing but the fact that Builders are seeing over a 10% drop in home sales should be bone chilling.  These home builders have put up “spec” houses and have been doing it at a fairly nonstop rate for quite a while.  In case you are wondering, like I was a few years back, what a “spec” house is, I thought I’d mention that it is a builder will speculate that a buyer can be found once the house is up, hence the term “spec” house.

Let’s look deeper into the report for more details.  We have been reporting since mid-summer last year that the housing market was rolling over and now the results are in plain view.  If you are reading a paper on Monday morning and there is a piece on the housing report read it carefully to see if you can see these items:

  1. New home sales are down 10.5%, most in nine years

  2. Inventory of new homes rose to a Record 548,000

  3. At current pace, there are enough homes to satisfy demand for 6.3 months

  4. AND, The Year over Year median price fell 3%

The median price fell is the key one that most articles do Not want to indicate.  But, October’s median price set the record at $243,900 and now they are below that by 5.5%.  Yes, the price of houses varies from city to city but on a country wide basis prices have Fallen 5.5% for New Homes.  The stock market should be paying strict attention to this because the driver for the economy (besides the government with its never ending red ink) is starting to sputter hard.

In other news on Friday, the durable goods orders were up 2.6% but the report was taken as negative due to the “modified” durable goods report which excludes the “volatile” transportation sector.  The number the market looked at showed a decline of 1.3%.  Again, this report taken along with the housing report, bolstered the market because both reports were weaker than the market expected and therefore…you guessed it, a double whammy on the Fed raising rates forever.  Therefore, buy stocks.

The power lasted for a while but there wasn’t much follow through, for the Dow, at least.  The NASDAQ Comp still is below its 2333 number and we continue to wait for the market to go down due to the over bought condition.  Maybe we will know more this week…in the mean time…

Be Careful out there…

Dow Industrials:  11,279.97  +9.68
RYVNX:   18.78
RYAIX:  22.09
TLT:  89.06
BEGBX:  13.00

Thursday, March 23, 2006

GOOG Moves to SP 500

The number we were waiting for on Thursday was the existing home sales and they showed a remarkable increase of 5.2%, surprising most analysts including me.  We thought that, given the whole housing rollover concept, housing sales would have been flat to down.  We need to remember that these sales are a bit of a lagging indicator due to the timing of the purchase.  In most cases, these homes were purchased, not in February, but in January.  The sales are then recorded when the closing occurs.  Since January was such a balmy month as some commentators mentioned, the sales for February benefited from that nice weather, in spite of slightly higher mortgage rates.  We tend to think there was a little spur after the holidays when people had the nice weather to shop for houses and a little extra push to get a mortgage rate before they started going up.  On Friday we get to hear about a more current indicator for housing, the New Home Sales report, and February durable goods orders.  The current consensus for durable goods is up 1.5%.

After an early up move out of the gate, the Dow dropped pretty hard after the first half hour of trading and then traded in a fairly narrow range the rest of the day.  In fact, other than the big reversal on Tuesday, the Dow has basically been in a 50 point trading range for a week and a half.  This sort of dull trading will not last for long and since the Dow is now overbought there will be some downward pressure.

In order to try to convince you otherwise, the news out of the SP500 after the close was that GOOG would be added, finally, to the index.  This move has been long awaited by the market and now it occurs after a 25% break in the stock price.  Well, that news was able to lift the price up nearly ten percent after the market closed.  

Be careful out there…and have a good weekend.  

Dow Industrials:  11,270.29  -47.14
RYVNX:   18.96
RYAIX:  22.20
TLT:  88.44
BEGBX:  12.91

Wednesday, March 22, 2006

Over Bought Again

Normally, after a day like Tuesday, the market would be down in the morning and then bounce a little for show and then drop into the close but not Wednesday.  On Wednesday, the market opened a bit down and then pretty much rallied all day.  There is pretty much no fear in the market and the bulls seem to be bold.  We talked about the volume on Tuesday’s reversal as being a little light for a key reversal and the bulls noticed it, too, or they didn’t and they just decided to buy the open, who really knows.  The point being that the volume on Wednesday was fairly light on a big up day for the Dow, up over 80 points.  

This reaction to Tuesday’s trading leaves us scratching our heads for Thursday.  Right now, it seems that anything goes.  We do see the potential for a cliff drop on the horizon due to this steady climb the Dow has been on but at the same time, we can’t seem to get anyone to get serious about selling.  

Right now the market is Over Bought and seems to be losing steam but it does seem to go up every day.  We must remind you that the NASDAQ Comp made a double top on Tuesday matching up almost to the penny with the January 11th high.  The 2333 level is now a ceiling of resistance that will be difficult to penetrate—again, not to say it won’t because it can.  As far as the Dow is concerned, it seems that there is a force pushing it up to try to get to the all time high just over 11,700 that occurred back in the year 2000.  Yes, that is six years of No change in the Dow.  And, the bulls continue to believe.  400 points may not seem like much but the Dow can’t go up all by itself for ever.  

The next two days bring us news on the housing and durable goods.  Thursday gives us the Existing Home Sales and Friday the Durable Goods Orders along with the New Home Sales.  Maybe the market won’t care about these numbers but the Wednesday Update certainly does.  This devil may care attitude about stocks will become a dangerous thing very soon.  We prefer the safety of being out and with funds paying around 4% on cash, this isn’t a bad time to be in cash.  Remember the Dow was at this level six years ago so 4% actually seems like a lot.

Be Careful out there…

Dow Industrials:  11,317.43  +81.96
RYVNX:   18.84
RYAIX:  22.12
TLT:  88.72
BEGBX:  13.04

Tuesday, March 21, 2006

Key Reversal Day

Where do we begin?  The stock market pushed to higher ground on Tuesday morning and hit a wall when the NASDAQ Comp got to that intra-day January high around 2333.  We have been commenting on the closing high near 2331 but the real high is the intra-day.  Today’s high bested that January high by 3 cents before hitting a solid brick wall.  

After that, the market came in quite a bit.  The Comp traded at 2332.95 mid-morning and closed at 2294.23 for nearly a full 40 points move.  By the end of the day the market sported a key reversal by going to a new high in the morning and reversing into the close.  We have another description for that and it is called an outside down day, very bearish trading pattern.  The only thing that was unsatisfying about it was that volume was not very robust so the price moves are not as powerful either, although NASDAQ volume was a little stronger than the NYSE.  But, we did see the highs hold and the reversal unfold.

The PPI (Producer Price Index) fell so hard that there was a mad scramble to focus on the core numbers which the market (and the Fed) wants to do, because that’s what it’s trained to do.  It’s like magic, don’t look over here, look in my other hand.  The PPI was down 1.4% in February for the fastest drop in nearly three years, but not to worry, the core rate was nicely positive at 0.3%, whew.  For a while there, we might have had to face the deflation story, we couldn’t do that, oh no.  

Seriously, the deflation story is going to become large over the course of the next year as both the stock market and the real estate market go down.  We have no reason to discuss this topic at length tonight but the story is getting more difficult to ignore as time goes on.  We are anxiously awaiting the housing numbers that are coming out later in the week.

One of the market drivers for Tuesday was the President’s speech in the morning declaring that the state of the economy and the Iraq war are good.  This propelled the market up a bit this morning and then there was nothing else to hold it up into the afternoon.  The ORCL news and the words of the new Fed head didn’t seem to move the market all that much.

For Tuesday the news is the last thing that is important, what we need to focus on is the important reversal at a critical point.  Our momentum indicators show the market to be overbought but the momentum is fairly weak.  On Tuesday, we saw a major reversal right at the right time and this is important.  

Then after the bell, the market was hit with more news, this time from MSFT (Microsoft) delaying the release of their new Windows Vista operating system.  The NASDAQ after hours market was troubled by this news and fell quite a bit.  Of course, it is overnight trading and the real trading doesn’t begin until Wednesday morning…stay tuned and…

Be careful out there…

Dow Industrials:  11,235.47  -39.06
RYVNX:   18.92
RYAIX:  22.17
TLT:  88.56
BEGBX:  13.02

Monday, March 20, 2006

Another Dull Day at the Office

On Monday, the market heard that the LEI, the leading economic indicators, had fallen a mild 0.2%, very much in line with the 0.3% forecasters had estimated.  One of the problems was that last month’s number was revised downward quite a bit, from up 1.1% to up only 0.5%.  Tuesday brings the PPI and we know what a crowd pleaser that number can be—Not.  The inflation numbers have really not been on the market’s radar screen for quite a while.  What’s on the Wednesday Update radar screen happens to be the housing numbers that are coming out later in the week.  We’ll see if the market can be stirred by these numbers, probably not.

Among other factors at work on Monday was the drop in oil prices of over $2 but not below $60 just yet.  Then, there was the ORCL (Oracle) earnings news after the close which had a negative effect on the price of that stock.  Later in the evening, the new Fed Chairman graced the world with a speech were he basically said he doesn’t know why longer term rates haven’t moved up as the Fed has pushed short rates up, but not to worry, the Fed doesn’t have a problem with the inverted yield curve.

For a Monday the market didn’t seem to have much life in it.  In the early going, the market did manage a little pop but that quickly faded and there was pretty much a flat line across the rest of the day, more or less a yawn of a day.  There is little to report either in economic news or market news.  Yes, the NASDAQ Comp was up a little but there is still a lid on it at 2325; and then there is still the January high of 2331.  This area has brought much resistance to the Comp over the past several months while the Dow has continued higher.  Now, the market is becoming overbought once again without much upside potential, it just appears tired.

By the way, we have re-assessed our thought on the momentum high.  We have said that the momentum high happened back in January.  Well, after looking at it again, we see that the momentum high was back in late November, with price highs occurring now in the Dow.  We think it’s just a matter of time at this point before the market rolls over in a big way.  Don’t be in its way.

Be careful out there…

Dow Industrials:  11,274.53  -5.12
RYVNX:   18.54
RYAIX:  21.94
TLT:  88.99
BEGBX:  13.11

Sunday, March 19, 2006

Another Relative High for the Dow

The Dow pushed to another new high on Friday but still left several indexes behind.  It’s true that the SP500 has been able to follow to a new relative high but we are most interested in the NASDAQ 100, the NDX.  This index is the basis for the two Rydex funds we are following at the bottom of each post.  We find it time once again to recommend buying one or both of them due to the market starting to get over bought.  These opportunities may not last for very long but they are here now so we should take advantage of them.

We are fairly convinced that the market will drop into the fall of the year with the nadir, low point, coming in September or October, maybe early November.  I don’t think we have expressed our opinion about how far these indexes can travel but we think a substantial amount.  This fall we will be set up for a good buying opportunity, better than we saw in the fall of 2005, or at least as good.  The point being, this opportunity will come with some value, a quality us contrarians like to embrace.  

So, right now the NASDAQ Comp is trading right at the 2300 level and we expect that by the time October comes, that index will be trading near 1600, or about a 700 point, 30% move.  That would mean the RYVNX would be up about 60%, given its double exposure, and the RYAIX would be up about 30% since it has a single exposure.  Take your pick, either one will be a good choice.

We are also long the TLT, a long dated Treasury bond fund, an ETF (Exchange Traded Fund, meaning it trades during the day, unlike mutual funds, which can only be traded at the close of trading).  The TLT fund offers exceptional value at the moment and comes with a monthly dividend for those of you interested in such things.  So, while you wait for price appreciation, you have the 4.5% yield to keep you warm at night.

Let’s take a quick look at the upcoming couple of weeks.  On Monday, the LEI (Leading Economic Indicators) are due out and the consensus is for a small drop of 0.3% after being up a big 1.1% in January.  Then on Tuesday, the PPI is scheduled for release and the consensus is for a similar 0.3% drop compared to last month’s increase of the same amount.  The read for “Core” PPI, you know the one without food and energy, is expected to come in a little higher, up 0.2% after being up 0.4% in January.  The world is apparently not focused on inflation numbers these days, along with a whole lot of other things (according to “Boston Legal”).  Thursday brings existing home sales and Friday brings durable goods orders and new home sales.  These home sales figures are important to the Wednesday Update (in case you forgot) so we will be focusing on them.  The following week is the much anticipated Fed meeting.

Be careful out there…

Dow Industrials:  11,279.65  +26.41
RYVNX:   18.62
RYAIX:  21.99
TLT:  88.85
BEGBX:  13.12

Thursday, March 16, 2006

Big Reversal in the NASDAQ Comp

On Thursday, the market stayed on the course we have been talking about for a while now; only today, the disparity between the indexes was very pronounced. With the entire market opening stronger, it looked like a peachy day for the bulls. About a half hour into the session, the market broke fairly hard except for the Dow, that index dropped a little and then traded in a tight range the rest of the day.

The early morning pre-opening news may have been somewhat influential in the early going with both the CPI and the February housing starts being announced. The CPI was basically a non-event, as it showed no inflation or barely any and was close to expectations at that. The housing starts were expected to be down but they weren’t down nearly as much as forecast. So, here goes the twisted logic once again, ready?

The stock market thought, hey, the housing starts are down so the Fed is less likely to stop raising rates sooner rather than later so the early morning trading was up as usual. Then they started thinking about it and realized that the forecast was for lower housing and much lower than they got so the thinking turned around during the day to, hey maybe the Fed can keep raising rates for a while. Oh my… Realize this is my own twisted thinking on what the market might be thinking, given the fact that is thinking at all.

Friday is options expiration and may get some action due to that. The volume today was a bit higher than it’s been for a couple of weeks, ok, not that much higher. And, come to think of it, the volume has not been very high compared to that during the January momentum highs. We always keep our eyes on such things because all of these technicals can be helpful at times.

Right now, today (Thursday), the NASDAQ market got slammed while the big cap stocks continue to enjoy a bit of a rally. Everyone is excited about the SP500 making new highs the last day or two. We would emphasize that the big cap stocks Should Not be leading this market and of course the NASDAQ was down hard today. In last night’s post, we mentioned the high from two Friday’s ago, 2325, and that the NASDAQ should stay below that level. The Comp went right up to 2323, almost 2324, and fell from there to close just under 2300, a very bearish reversal.

One index we follow closely is the SOX, the Philadelphia Semiconductor Index. Two weeks ago on Thursday, March 2, the SOX traded just over 550. This day, the SOX closed down over 16 points at 496. This index has dropped over ten percent in two weeks. Who is paying attention to that? That would be the Wednesday Update.

Be careful out there…

Have a good weekend and enjoy the basketball tourney.

Dow Industrials: 11,253.24 +43.47
RYVNX: 18.74
RYAIX: 22.05
TLT: 89.12
BEGBX: 13.13

Wednesday, March 15, 2006

Another Up Day

Not much to say on the evening of the new relative highs in the Dow and the SP500, except that prices are up in these two large cap indexes.  We have seen the market move up for all kinds of reasons that are either justified or rationalized by the market.  We don’t happen to agree with the logic of the market but the large caps have definitely risen in this last week or so, higher than we thought they should or might.

We spent considerable time describing the retracement levels for the NASDAQ Comp and thought a nice level would be somewhere between 2278 and 2296.  Tuesday’s close was nice due to the extreme nature of the move, sort of climactic as it played out.  The closing price was near our 2296 level we talked about several sessions ago.  We preferred ‘the move back to 2296 and maybe a little higher but it should Stay Under the 2325 from last Friday” which was Friday the third of March.  Wednesday the index closed at 2311 and we still think the 2325 will hold.  Time will tell because we have lost some of the other indexes to new relative highs so it’s possible the Comp will move up too.  

We do Not prefer this move back above 2325 in the Comp.  We like it that the large caps, mostly the Dow, have moved to new relative highs and have left these smaller cap indexes behind.  We continue to count on this line of thinking.  In any event, the market’s momentum high seems to be stuck back in January and now it’s simply holding on to the hope.  

Be careful out there…

Dow Industrials:  11,209.77  +58.43
RYVNX:   18.40
RYAIX:  21.85
TLT:  88.32
BEGBX:  13.01

Tuesday, March 14, 2006

The Ides of March is Upon Us

There are several items to discuss so let’s get to it.  Tuesday brought an enthusiastic market in reaction to several “interest rate” related items.  Late Monday we heard that the Tough Fed may not need to be so tough due to wage pressure not pushing up inflation.  The Fed is now getting ready to be cautious in the future to make sure they don’t overshoot on interest rates.  This happy talk along was instrumental in the up move on Tuesday.  

Add to that, the retail sales fell last month, pulled down by weak auto sales and lower gasoline receipts, lucky us.  The WSJ says that “economists say underlying sales remain relatively strong and they don’t believe consumer spending is slowing.”  But, here again, the bias is for the market to interpret this report as bullish due to a lid being slowly put on interest rates.  In contrast to these reports, we did see that oil has been up sharply in the past two days and that Goldman Sachs had blowout earnings to start the earnings season.  

GOOG was in the news again today, not that I want to mention why, just that it was in the news (go read about it yourself).  The news lathered up some buyers and pushed GOOG up several points, 14 to be exact, in Tuesday’s trading.  You know that GOOG has replaced GM as the market leader—ok, so it’s a little stretch but not much.  

For the Wednesday Update, there were some developments in the index watch.  Tuesday pushed up the Dow to a new recovery high and the SP 500 managed a new high as well.  These two blue chip indexes were the only ones that managed to go to new highs and we caution you to pay attention to this type of technical pattern.  The strongest index we have mentioned is the Russell 2000 (RUT) and it failed to achieve a new high on Tuesday.

The market is faced with some other news in the coming days.  This is an options expiration week, not a quad witch like next month but still a possible force in the market.  Thursday will give us the February CPI and Housing Starts and next week we see PPI, New Home Sales and Durable Goods Orders.  Then the following week we will see the Fed raise interest rates another 25 bps.  The market has managed to get through a lot of difficult news items but the cracks are beginning to show up.  We point to the particularly timid trading volumes and the non-confirmations from the broader indexes while the Dow sets new relative highs.  How are your stocks performing?

These are difficult times and we recommend caution on this “Ides of March”.  We are close to the inflection point so… Be careful out there…

Dow Industrials:  11,151.34  +75.32
RYVNX:   18.69
RYAIX:  22.03
TLT:  88.80
BEGBX:  12.98

Monday, March 13, 2006

The 2/28 Mortgage

Monday brought a nothing day to the stock market.  There was an up bias to the early part of the day but by the end of the day the Dow has lost 32, cents not dollars, big move.  With nothing in particular going on this Monday, the market managed to stay even.  We don’t see how the market continues to manage to hold on to these prices.  Interest rates are seemingly on the rise and the Fed seems bound to raise rates again at this month’s FOMC meeting.  Would it be possible for the Fed to keep raising rates and the Dow to stay flat for the rest of the year?  The answer must be that the market thinks that the Fed will Stop raising rates soon enough and therefore we can’t sell now because there will be a big rally when they stop.  Twisted logic, I agree.

Tonight we focus on the housing market one more time because interest rates have had a minor up tick over the past ten days or so.  The WSJ had an article entitled “At the Doorstep: Millions Are Facing Monthly Squeeze on House Payments”.  According to the online WSJ that I read, this is the top read story of the day.  We thought it fitting to mention it here and you may want to read it for yourself in the print version, if you can find it (page A1).  

The article points out that “many households took advantage of ‘affordability’ mortgage loans—heavily promoted by lenders—that hold down payments for an initial period.”  We would add that the ARM versions were heavily promoted by the former Fed Chairman, Greenspan, in case you forgot his name.  

The article says that about a quarter of all mortgage loans outstanding will come up for interest rate resets in 2006 and 2007, that’s 25%!!!  The article adds that property taxes and energy costs have gone up to squeeze the fragile homeowners as well.  

The article states that 1.4 million households face a jump of 50% or more in their monthly payments when these initial low payment periods run out.  Many homeowners are seeking help in order to find ways to deal with these heavy costs, with many more expected to be seeking help in the future.  

Some of these borrowers will refinance into new 2/28 loans that are set for 2 years and then for the last 28 years can be reset every six months.  “These loans generally limit the size of the first jump to around three percentage points… Monthly payments for a borrower with a loan of about $150,000 would rise to about $1315 from $1000.”  

The last paragraph states that “A common sales pitch for 2/28 loans is that the borrower can use those first two years before the reset to improve his or her credit score and then qualify for a cheaper prime loan. ‘But that goal is rarely realized’…As the housing market cools, it probably will get harder for marginal borrowers to refinance on attractive terms…”

Be careful out there…  

Dow Industrials:  11,076.02  -0.32
RYVNX:   19.33
RYAIX:  22.40
TLT:  88.21
BEGBX:  12.92

Sunday, March 12, 2006

Dow Flying Alone

The stock market gets ready to open for another week of trading.  Last Friday, the jobs report seemed to bolster the market a bit with the Dow jumping about a hundred points.  We have said for the last several weeks, most of the year in fact, that the Dow has remained strong while the broader market has not been a part of that move. The closest major index to the Dow is the Russell 2000 which fell from its new highs about a week ago and now has to move quite a bit to catch up to the Dow.  Again, that’s not to say that it won’t catch up, just that it hasn’t so far.  

I think more important to the Wednesday Update is the SOX, the Philadelphia Semi-Conductor Index.  The SOX has fallen in the same time frame as the RUT (Russell 2000) and had kept falling.  Even with Friday’s 100+ point move in the Dow, the SOX was down.  This is a particularly glaring signal that we are paying close attention to.  Our favorite little stock, INTC, has dropped below 20 and the stock is now pushing on support from about two years ago right at this level.  Further selling should be imminent.

We are avoiding the news in our recent posts because the news is what it is but the market is doing what it does best, confuse the most participants it can.  We think that the news serves to confuse even more so we want to pay attention to the market.  Right now and for the past several weeks the Dow has been showing some strength while the broader averages have not followed suit.  This is classic early stages of a downturn.

Be careful out there…

Dow Industrials:  11,076.34  +104.06
RYVNX:   19.45
RYAIX:  22.47
TLT:  88.28
BEGBX:  12.88

Thursday, March 09, 2006

Jobs Report Looms

To our way of thinking, Thursday’s market was very weak.  With trading up in the morning on a perfectly reasonable rally day, the market decided not to rally but instead pulled back.  The market has been making signs that it wants to go down and you have read about some of those signs in these posts recently.  The primary sign was the Dow being strong while the broader indexes did not participate very well.  

Last Friday the Dow put in a fairly good high as a point of reference.  We chose to look at the NASDAQ Comp in yesterday’s post and we refer to it again here tonight.  As we said, the Comp had dropped about 75 points and the natural retracement level would be based on Fibonacci numbers that indicated between 28 and 46 points.  Friday’s jobs report could change our thinking on this but Thursday’s market managed to take the Comp up 29 points from Wednesday’s lows and then it hit a wall and fell the rest of the day to close right about at Wednesday’s lows.  We think this means that the best the Comp can do in Friday’s market is to get back to that 2279 number of Thursday.  

We apologize for all of the technical talk the last few days but the message is clear:  stocks want to head down right now.  Today had to scare some of the bulls especially as the market couldn’t bounce off what should be very good support.  The next move could be what they call nonlinear meaning a drop of unnatural proportions.  The market is sitting in a very precarious position after Thursday’s close and needs desperately to have a rally.  We think the buyers are tapped out.

If the jobs report can revive the market for a little while that would be a bad sign in our opinion.  Likewise if the jobs report provides some further selling, that would also be bad because of where the prices are at the close on Thursday.  

We urge you to take a close look at your holdings, where ever and what ever they are to see if they are performing up to your expectations.  If not, this would be an excellent time to consider unloading some of your dead wood.  I see that INTC dropped below 20 today on its way, in our opinion, to single digits.  This stock was touted by the great Jim Cramer and about six weeks afterwards, it has dropped 20%.  This is the type of stock that should be released from your portfolios.  Of course, it should have been dropped when the Jim Cramer hype was all over the place; but that was the time when everyone was buying it, probably from Cramer.

We have been warning you to be careful out there and tonight is no different.  The market has become very treacherous.  We are anxious to see how trading unfolds on Friday.  We could see a rally back to 2279 in the NASDAQ Comp and that would be the time to exit.  Otherwise, the market could just go down from here with no buyers in sight.

Dow Industrials:  10,972.28  -33.46
RYVNX:   19.50  (well, maybe yesterday’s quote was right???)
RYAIX:  22.50
TLT:  88.61
BEGBX:  12.93

Wednesday, March 08, 2006

Correcting the Downturn

The stock market, following our preferred path, put in a pretty good low on Wednesday with a good rally after that.  The overnight futures are a fair bit strong this evening, too.  We think that the market will continue its up trend up until Friday morning at which time we don’t think there will be much, if any, reason to be long this market.  But, we will try to be patient until then just to be safe.

We think the current rally that started Wednesday afternoon is correcting the down draft that we have experienced since last week.  Looking specifically at the NASDAQ Comp, we see a high right at 2325 last Friday and a low today of about 2250 to pick fairly round numbers.  That’s a drop of about 75 points, just over 3%.  Today’s late rally took the Comp up to 2275 for a 25 point move, which would be a third or 33.3% of the decline.  Fibonacci retracements would suggest a range of 28 to 46 points for the correction putting the Comp anywhere between 2278, near its high for today, and 2296.  We prefer the move back to 2296 and maybe just a little higher but it should Stay Under the 2325 from last Friday.

If we truly are back to trading a down market we may not get to see that 2296 because of the strong down move that we expect this year.  That move could have started in earnest on Friday giving some fear to the market in the near term.  We can not be certain of this until we see what this corrective up move does.  Thursday should give us a really good indication of the near term move.  We will give our opinion in the next post.

Thanks for the comment, Charles.  I did see that article today and thought it was part of the reason for a short term bounce, what a true contrarian I am.  Those of you who didn’t see the article, Charles included the website in the comment from Wednesday.  And, I don’t really think the “experts” are reading the blog but then I don’t know.

We saw a good article in Wednesday’s CNN reports, too.  We have mentioned Mr. Roach a few times in the past few years and he brings us a good article again.  We encourage you to read the article, paying particular attention to the American side of the story due to the fact that his thought process seems to be close to mine.  He might be reading the blog too but I know he’s probably not.  Here’s the website:

In the mean time, Be careful out there…

Dow Industrials:  11,005.74  +25.05
RYVNX:   19.12 (This is not correct, should probably be 18.91)
RYAIX:  22.27
TLT:  88.58
BEGBX:  12.95  (the dollar has had a good run)

Tuesday, March 07, 2006

Was the Market Down Tuesday?

Let’s get right to the action for Tuesday.  The stock market kept going down after Monday’s drop but the Dow will be announced to the world and it managed a positive close.  When the NASDAQ Comp is down over 17 points and the Dow is up about 22, the “market” was down.  One way to view it is that on the NYSE, the declining stocks were ahead of the advancing by about a three to one margin.  

The news indicated nothing very noteworthy but there has been some media attention to the interest rates going up.  The last few days, the bonds have taken a beating as you can see by looking at TLT in the last four posts.  The recognition of the inverted yield curve is still a little bit in the background but the possibility of higher rates seems to worry the market a little.  Of course on Tuesday the bonds were flat to up a little and oil prices dropped below $62, neither of which should cause a drop.

Our opinion is that the market has now shown its hand a little more.  In Elliot Wave Theory, we have seen a pretty good five wave move down in the last two or three days since last Friday’s peak.  Right now the market could stage a corrective rally or it could drop a little more before it starts its rally.  We prefer the rally now as we see the Friday jobs report again as a potential turning point.  With the market somewhat focused on interest rates and what might cause them to go up, a strong jobs report may actually be cause for selling stocks.  

Make no mistake about it, we do not envision higher interest rates coming from a strong economy.  We actually prefer the deflation theory primarily due to the inverted yield curve.  This type of thinking can start to be considered again and we will explore that theory over the next few months here in these posts.  If rates do rise more in the short run, that will improve the theory as it will hasten the demise of the housing market.  As you faithful readers know, the Wednesday Update believes the housing market will go down of its own choosing, not because mortgage rates will go up.  2006 seems like a very important year for housing and its baby sister, the economy.  

Caution is the watchword so Be very careful out there… If we get this rally into Friday’s jobs report that I’m hoping for, we expect it will not take out last Friday’s highs.  That being the case, we will probably be in a position to sell into this rally.  If by chance we do get a rally above last week’s peaks, then we will need to reassess but this is our current plan.

Dow Industrials:  10,980.69  +22.10
RYVNX:   18.92
RYAIX:  22.28
TLT:  88.61
BEGBX:  12.95

Monday, March 06, 2006

A Down Monday???

Tuesday’s Wall Street Journal is running an article on the Credit Markets section entitled “Interest Rates Keep Climbing; For How Long?”  This article scratches the surface for possible reasons for higher interest rates and it is recommended reading from the Wednesday Update.  We aren’t sure that they have the story 100% correct but the themes are important in recognizing what is going on in the world today as far as interest rates go.

One thing that is glossed over is the near term decision in Japan of its willingness to end the absurd interest rate situation in place there for the last decade or so, that being the 0% interest rates on the short end of the curve.  We mention this due to the recent unwinding of the US carry trade we have discussed in the past.

Briefly, the carry trade allows someone to borrow money at the short end of the curve in order to carry a longer dated and higher yielding asset out on the curve a ways.  In Normal yield curves, longer maturities have higher yields due to the uncertainty of the coupon payments.  As you know, recently the yield curve in the US has trended to an inversion, meaning rates on longer dated maturities yield Less than shorter dated maturities.  Typically, this has foreshadowed a recession due to people Not wanting to borrow short due to the higher rates and therefore not borrowing and spending leading to the recession.

We here at the Wednesday Update have become more and more convinced that the seeming invincibility of the stock market in the face of an inverted yield curve is based on the possibility of borrowing in Japan with those exceptionally low rates and investing in, say, the US markets.  We have No conclusive evidence to provide but if the Markets think this may be true, then any change in that status may be important.  This change is indicated in the article but the implications are not as vividly described as we have here.

I would welcome any comments on this subject in any form, in the comment section would be the best so all of our readers can get a chance to benefit from your comments or questions.  

Back to Monday’s market:  We had a down Monday, something I find very unusual normally but not anymore due to the change in the wind, the direction of the market.  There were supportive news items like the Blackberry settlement from last week and oil dropping nearly two dollars today but the market managed to dig down a bit today and the Dow fell below 11,000 again.  

There have been signs pointing to a weaker market over the past couple of months and now the prices have started to reflect them.  We don’t have the space tonight to describe all of those signs but you can review the archives of this blog for further information.  The biggest sign is the strength in the Dow not confirmed by the broader indexes.  The only index that has tried to stay with the Dow is the Russell 2000, an index that is now very frothy and ready to lead the decline.  This index is associated with the many small cap growth funds that have become so popular over the past couple of years, especially in those 401(k)’s.

We recommend that you heed these signs and be very careful out there…

Dow Industrials:  10,958.59  -63.00
RYVNX:   18.92
RYAIX:  22.15
TLT:  88.55
BEGBX:  13.09

Sunday, March 05, 2006

RIMM Settles

The Dow is struggling to keep up its fight to hold 11,000. Going into Friday afternoon, there were hopes for strong finish to a volatile week but sellers came in before the close and drove prices down from about 80 points higher to finish just under water. Similar things were happening in the broader indexes with the SP500, up nearly ten points during the early afternoon, closing down almost two; and, the NASDAQ Comp, up about 15 in the afternoon, closed down over eight points.

Late Friday, a story broke on RIMM. We have been watching, and you probably have too, the patent dispute over the Blackberry. Apparently, the two opposing parties were able to settle their differences with a little cash, I guess money still talks. In late trading on Friday, RIMM had a nice pop in price after this announcement. Looking at the price of this stock over the past several months, it doesn’t appear that anyone was at all worried that this dispute was not going to be settled for the Blackberry users. The trading in this stock should be fascinating on Monday.

There was a lot of happy (translate that Bullish) talk over the weekend from all kinds of media sources. From our deep contrarian spirit comes a sense of calm after all this rationalizing of the bullish position. We continue to be patient on the market as we know that they, the bulls, might have one last little push in them but it doesn’t really matter. The market is trying so hard to maintain its current status when we all know that the hardest market to buy is a bull market, it just never gives you a chance: You always have to buy at higher prices. This market is definitely not like that.

There are some big numbers coming out this week, the biggest of which is the jobs report due on Friday. We will keep you posted on the developing economic events that may move the markets. Be careful out there, be very careful…

PS Warren Buffet's letter to shareholder's is available and is a must read.

Visit for the full text.

Dow Industrials: 11,021.59 -3.92
RYVNX: 18.60
RYAIX: 21.96
TLT: 89.33
BEGBX: 13.12

Thursday, March 02, 2006

Market is Still Confused

The market decided not to extend Wednesday’s rally.  There wasn’t much action in stocks on Thursday.  The action was happening outside the stock market as is sometimes the case.  The dollar was down about a percent while silver was up over 4% to close above $10.  That move was enough to push PAAS up about 10%.  The bond market was down a little, about a half of a percent.  Oil was up about 2% to over $63 a barrel and if anyone was interested gas prices here in Minneapolis are near $2.50 today after we saw them touch just under $2.00 about a month ago.

Some of the news that may have had a bearing on trading today includes some retailers reporting soft February sales (due to bad weather).  ANF (Abercromie and Fitch) got smacked for almost 10%.  The ECB (European Central Bank) raised its key interest rate 25 bps to 2.5% while forecasting more growth in Europe.  Meanwhile, Congress approved an extra 13 weeks of disaster unemployment benefits for people out of work due to Katrina and Rita.  

Friday we hear about the University of Michigan Consumer Sentiment Index which is estimated to drop from 91.2 to 88.  The other data point for Friday is the February ISM Non-Manufacturing Index estimated to increase a bit to 58 (numbers about 50 indicate expansion).  Normally we would be talking about the jobs report coming out on the first Friday of the month but not this month.  The jobs report is coming out next Friday so not to worry.

As far as we can see the market is now poised for a drop.  The market has struggled to get up to these lofty levels and is having trouble maintaining these high prices.  The momentum of this rally is now behind us with an eerie sense of a drop coming.  For those of you who feel safer than you did a few weeks ago, you should make sure that your stocks have been able to outperform the momentum highs set earlier in the year.  If not, I would say that the rally for those stocks is over too.  Take care and…

Be careful out there, be extremely careful…

Dow Industrials:  11,025.51  -28.02
RYVNX:   18.37
RYAIX:  21.82
TLT:  89.85  (ouch)
BEGBX:  13.13

Wednesday, March 01, 2006

First of the Month is Strong

In market news today, the SOX, the Philadelphia Semiconductor index, exploded for more the 4% pushing the NASDAQ up in the process.  This type of move generally carries some event and on Wednesday morning the event was semiconductor stock analysts.  The big story, and this happens every year, is the second half of the year when analysts expect a major push on capital spending which translates to companies refreshing their technology.  

We could speak about the possibility or impossibility of that event today like the analysts did but none of us can predict the second half of the year.  We try to say that the consumer is at the end of the financial rope and needs to slow down their credit expansion which Should mean companies would actually pull down their cap ex spending.  

In that regard, Wednesday morning’s news on personal income and spending does dispute that statement as personal income rose 0.7% and spending rose 0.9%.  These numbers combine to let us know that people are spending more than their increase in salary.  Indeed, 2005 was the first year in a long time that the national savings rate was negative, meaning that people spent more than they earned.  

January construction spending was up a modest 0.1% with the consensus being up 1.0%.  This is generally in line with new home sales from earlier in the week, or should we say weak.  

In the mean time the stock market is generating a lot of turbulence but not going any where fast.  Wednesday, being the first of the month of March, didn’t really surprise us when there was a substantial rally but what do the bulls do for an encore?  We have seen a back a forth movement for a few weeks now and that tune is named “Turn”.  We fully expect that the market will drop and we say that for several reasons but one of the strong reasons has to do with the market.  Mr. Market doesn’t usually let people in if a bull market is afoot.  

Be extremely careful out there…

Dow Industrials:  11,053.53  +60.12
RYVNX:  18.35
RYAIX:  21.82
TLT:  90.48  (32 cent xdiv)
BEGBX:  13.08