Sunday, May 21, 2006

Market Trying to Stop Bleeding

The stock market showed some signs of life on Thursday and Friday but was this due to the options expiration on Friday?  Volume was heavy on Friday due mostly to the options expiration, we think.  The market is finally showing signs of being oversold and now it’s up to the bulls to see if they can mount a rally.  After a 500 point Dow downdraft, a normal corrective rally would be around 200 points.  The way this market is trading that doesn’t seem like much to us.  

The upcoming week should be a little less dramatic than the last two weeks.  There is a holiday weekend coming up, the opening three day weekend of “summer”.  The end of the month is in sight and that is normally a stronger period of the month.  We just don’t see any reason to be getting long in this rally.  We see it as a time to unload what’s left of your stock.  The rally is in no way guaranteed but the market is showing signs that a bounce may occur, how ever much that will be, we don’t really know.  200 points would be our guess but less than that is certainly possible the way this decline started.

We cannot definitively declare that the “top” is in due to the continued liquidity in the system.  From our standpoint, we see the residential real estate market being a tough place to be right now.  With prices gradually coming down, the real estate speculators, now called flippers, may be in a bit of a bind.  Of course, since real estate “always goes up”, the speculator feels that waiting longer is all that needs to be done to get the higher prices.  That thinking may get many of them in larger and larger losses.

This decline does Feel like the top is in, but we have seen this type of thing before with no follow thru to the downside.  This time may be different due to the timing of the decline (in May) and the over bought nature of the market, not to mention the unabashed bullishness of the participants.

We consider the upcoming week with its many reports:  durable goods and new home sales on Wednesday, GDP and existing home sales on Thursday, and Friday’s information on personal income and spending.  The week has some potential for problems but the focus on “bad” numbers allowing the Fed to stop raising rates may still be the theme to watch.  

The big movers on Friday were the precious metals as both gold and silver got slammed pretty hard.  Gold got hit for over $20 and silver is back down in the low $12 range.  Finally, the mining stocks outperformed the metals.  This could be a sign that the huge drop in metals may take a break here but we don’t think it will really stop for a while.  These overbought markets can’t get these conditions taken care of in a week.  There needs to be both time and Pain for those that bought into these highs.

As we put this post up, the overnight stock futures are showing a positive opening in the making.  Does that surprise us on Monday eve?  Not really.  With no fear, this market is certainly not done going down.  Once fear starts coming into the market we will start thinking about getting back in.  For now, cash is king.

Be careful out there…

Dow Industrials:  11,144.06  +15.77
RYVNX:   20.87
RYAIX:  23.37
TLT:  84.43
BEGBX:  13.53

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