Thursday, June 29, 2006

Rate Hike is Bullish?

The stock market staged an impressive rally on Thursday, the day of the Fed’s potential final bump in interest rates.  As we saw on Wednesday, the market had found some support and on Thursday, the market came out like gangbusters, with the Dow up 50 right at the bell.  The rest of the morning was spent just waiting for the inevitable rate hike, with just the amount and the announcement in question.  In our post yesterday, we said we would be bullish from about 1:15 CDT but the market couldn’t wait until then.  When the announcement finally came, the market just exploded, with the Dow popping 100 points in about three minutes.  I guess all of our readers took our advice and purchased stock right at 1:15 CDT.  

The pattern that this market has left us with is certainly open to interpretation but the three wave downward move seems to leave open the possibility of another leg up to new highs in the Dow.  This same pattern is not evident in the other indexes we follow, except maybe the Russell 2000.  So, at the current time the market is sending a mixed message that we interpret as giving some leeway on the upside for the Dow.  This is the type of thing that we did not want to happen but with the Dow making a run at the old highs and the broader markets failing to best their recent highs, which seems typical at the end of a move.  If the Dow would make a new all time high, there is no possible way that the NASDAQ could even get close to its old highs.  At this point we must wait and see.  With Friday being the end of the month and the beginning of a good holiday weekend, there will be ample time for the market to digest Thursday’s rally and what it means for the near term trading.  

One of the things that looks a little suspect about Thursday’s rally is the volume figures, not as high as you would want given the type of move we saw.  The headlines will make it seem that we are approaching Nirvana to the public.  They will be able to rest a little easier knowing the “worst is now behind us”.  This is called complacency and will be rewarded with poor returns longer term but in the short term, they are going to be happy.

We feel that this rally is the Last rally and, where ever this ends, we plan to put the rest of our funds to work on the downside.  Right now, we need to be patient and cautious.  At any time the broader market could go the other way and leave the Dow trading higher.  

[Editor’s note:  With the holiday weekend coming up, there will be No Update posting until Wednesday evening.  We know you will miss the Updates but we will be back on the evening of July 5th.]

In the meantime, Be careful out there… and have a great and safe Fourth of July holiday.  

Dow Industrials:  11,190.80  +217.24
RYVNX:   21.23
RYAIX:  23.70
TLT:  83.51
BEGBX:  13.32

Wednesday, June 28, 2006


Finally, we will have the rate decision and the “announcement” from the Fed.  The market is in a state of fear waiting for the Fed to make its announcement, fearing that there will be no end in sight for rate hikes or that the hike will be 50 bps instead of 25.  

Our opinion is that the highest probability event is that the Fed will stay the course, meaning that the rate hike will come in at 25 bps and the Fed will continue to be vigilant on inflation.  This will cause the markets to drop in the very short term, say ten minutes, before yielding to higher prices into the end of the month which of course is just one day.  We don’t think this rally is worth trading this evening due to the very balanced place the market is technically.  Know that we could easily be wrong in this estimation.  The best bet is to watch the reaction to the market to get a good sense of what is going to happen.

We think there is an outside chance that the Fed would Finish its rate hikes with a quick 50 bps hike at which time they will announce that it probably is the last one.  This would be extremely bullish in the very short term, maybe a week, which happens to be the strongest period during the month anyway (not to mention it’s a holiday weekend).  

The other probabilities just don’t seem worth talking about so…it appears the Update is bullish starting around 1:15 CDT and going to about Thursday, July 6th, at about 10:00 CDT.  We do not recommend buying anything for that rally, just be prepared to unload some stock when we get close to the end of this next rally.  

If you feel the need to buy something on Thursday, make sure you are only committed to it for a very short period of time.  If you make a quick 5% or so, take it.  Just set a good trade up and get in and get out, don’t look back—profits are profits.

We’ll be back tomorrow for analysis on what the Fed did tomorrow—does that make sense?

Be careful out there…

Dow Industrials:  10,973.56  +48.82
RYVNX:   22.61
RYAIX:  24.45
TLT:  83.23
BEGBX:  13.19

Tuesday, June 27, 2006

Volatility is King

The stock market fell strongly on Tuesday led by one of our favorite indexes, the SOX which was down 3.75%.  The SOX is very near a 52 week low, about 4% to go for that, and has led this decline from early May, but has also led since the early part of the year.  The SOX traded just about to 560 back in late January and now has dropped to 431, for nearly a 23% drop in about five months.  This index is tied closely to the NASDAQ Comp and the NASDAQ 100 which is where we have suggested getting into those Rydex inverse funds.  Unfortunately, the NASDAQ 100 hasn’t quite dropped that much…yet.

We wanted to discuss the relative values of the major indexes we follow just to let you know that the Dow is not showing us the true picture, which is normal.  For the sake of time and understanding we will stay with just the Dow and the NASDAQ Comp.  On May 10th, the Dow closed at a high of 11,642 and Tuesday it closed at 10,924 for a drop of 6.2%.  From May 10th to Tuesday, the NASDAQ Comp dropped from 2320 to 2100 for a drop of 220 points or 9.5%.  We like the idea that the Dow is masking the real decline in the stock market and will continue to feel confident in our call for lower prices based partly on this reality.  One other thing, volume picked up a little on Tuesday, nothing really definitive but higher than the last couple of days.

Back to the trading day, the stock market started out on a relatively quiet note, and higher, but quickly moved lower and stayed lower for the day closing near the lows of the session.  There were a few attempts at rallies but all failed.  

One of the news items we were waiting for was the existing home sales which were down but not as much as expected.  We mention the housing sales for the last two days giving us headline information but there is much going on under the headlines, especially in terms of where inventories are.  Inventories of existing homes are at 3.6 million units which is about 6.5 months of sales at the current pace.  The True Contrarian has another viewpoint which we highly recommend reading today.  Just click the link to the left and then go down to the bold print discussing housing.  He continues with his look at the economy and interest rates and how we have an inverted yield curve, something that has not received much press this time around.  He is a gold analyst and suggests that real interest rates are nearing a high due to the actual rate of inflation compared to the interest rates and this should cause further weakness in the precious metals.  We find his logic helpful and very close to our own.

The widely anticipated Fed meeting is starting on Wednesday and the stock market is just a little jittery going into the start of the meeting.  The stock market seems to be preparing for another fall, starting on Tuesday (the 27th of June).  We like to think the stock market would tell us something about its feelings one way or the other on the Fed but right now it just seems a little scared.

Be careful out there…

Dow Industrials:  10,924.74  -120.54
RYVNX:   22.94
RYAIX:  24.63
TLT:  83.67
BEGBX:  13.22

Monday, June 26, 2006

New Home Sales Up?

Well, that’s comforting, the new home sales were reported to be Up 4.6% in May.  At the same time, the home builder Lennar announced, like so many others in the home building industry, that they were experiencing softer market conditions and a pullback in demand.  How do those two reports match up?  We did see one explanation of it, that the home builders are trying to sell inventory and reduced prices to do it.  That could make some sense but the two articles taken together seem suspect.

Tuesday brings sales for existing homes which is a much bigger proportion of home sales.  It does tend to be a lagging indicator compared to the new home sales.  As we have indicated here in the past, new home sales are reported as soon as the purchase order is signed while existing home sales are not reported until closing, which is much later.  The numbers did not scare the market as there might be some general disbelief in them.

Trading has been very subdued over the past couple of sessions with volume barely registering on the scale.  To be fair, we have seen lower volume during the past year.  Low volume is not a bullish sign and we are coming up on the end of the quarter.  It’s almost eerie as we seem to be waiting for the Fed’s announcement on Thursday [sorry, we had the date wrong in Sunday evening’s post].  One article said that if the Fed does raise a half a point, the market would tank for sure.  We are not so sure, one, if the Fed would raise a half point and, two, if they said it was the time to pause, the market would be pretty happy.  Monday’s housing numbers certainly don’t argue for “weaker” economic data in order to pause.

Tuesday also brings us some consumer confidence numbers and the Richmond Fed manufacturing index, neither of which should be market moving, why?...because the Fed is going to be telling the market what to do on Thursday.  

Be careful out there…

Dow Industrials:  11,045.28  +56.19
RYVNX:   22.11
RYAIX:  24.17
TLT:  83.26
BEGBX:  13.22

Sunday, June 25, 2006

Big Week Ahead

Here we are in front of a few big days in the stock market. First, we get the housing sales for both new and used (ok Existing) homes on Monday and Tuesday. Then we get the Fed’s news on interest rates on Wednesday [Editor's note: Really it's Thursday when the decision comes down]. This is the last week of the month, a traditionally stronger part of the month but anything goes this week.

We have remained short through this decline and the recent correction of the decline and we will remain short through the end of the month as well. We didn’t get into this game to be trading small moves. We want to trade intermediate trends if possible. The stock market has been a treacherous place for most over the past couple of months and we continue to see this as the norm for several months to come.

The next few days will tell us much about the near term course of the market and on this side of it, we can only speculate on the direction the markets will take on whatever the news may be. What we can say is that the past is merely prelude; I guess someone else said that but it is true now. The markets are poised to go down further; we think it’s just a matter of time.

We have said that the housing market is the key to the stock market’s future. That is why we follow the housing stats so much. We find it interesting that WSJ has suggested that the mortgage bunch (read that, housing related jobs) should brush off their resumes and move over to the health care industry, that way it won’t be the “end of the world”. You can imagine the bullishness that backed up that statement. We find health care to be a good industry for the next generation due to the aging of the baby boomers but we don’t see much speculation opportunity at the moment. Maybe all those condo’s could be turned into nursing homes—ok, I’ll stop. Come back tomorrow for some analysis on the new home sales.

By the way, it seems like a long time ago but on Friday the durable goods orders fell a bit rather than the gain that was expected. We recognize that durable goods orders do tend to jump around a bit but they are confirming the housing slowdown—in our opinion, imho.

Be careful out there…

Dow Industrials: 10,989.09 -30.02
RYVNX: 22.25
RYAIX: 24.24
TLT: 83.42 (bonds have been under pressure again)
BEGBX: 13.18 (dollar has been stronger)

Thursday, June 22, 2006

LEI Disappoints

On Thursday, the stock market nearly reversed the gain from Wednesday’s trading.  Do you get the feeling of Volatility?  As we mentioned in the last post, the market drifted lower at the end of the day on Wednesday, cooling the bulls hope for a meaningful rally and Thursday morning continued the trend lower.  By midday, the Dow was down about 90 points but that was the low for the day and it managed to close down only about 60.  

The morning’s LEI number was about as expected down 0.6% versus expectations of down 0.5% but the market didn’t seem to like that.  

The other news, rumor, of the day was the Fed’s rate action anticipation for next week—apparently there was a rumor floating around that the Fed was going to bump rates a full 50 bps.  This sent the dollar up strongly and pushed the precious metals down and of course held the stock market down as well.  The most interesting market was the Treasury bonds which finally noticed the interest rate news and dropped a bit.  

The notion that the Fed would raise 50 bps next week is almost ludicrous.  While the Fed has talked tough over the past few weeks to have the market do their work for them, the last thing they want to do is raise rates at this time.  We have said that the Fed is desperately seeking weaker economic data so it can slow down on the interest rate hikes.  This week’s housing starts being higher than expected dashed those hopes so today the market decided to go overboard on the rate hike prediction.  It is something to pay attention to because the market would not react negatively if it really didn’t want to go down.

On the other hand, next week’s rate decision and corresponding announcement looms large and will be something that should move the markets.  We are still waiting for more information before stepping out on a prediction.  But we will try to make a decision so you have a little time to prepare.  We would suggest that the rally that might show up due to a statement that the Fed is backing off will be a good time to sell.  The market is vulnerable and will probably try to give the Fed its due but then it’s off to the cellar over the next few months.

After the close on Thursday, ORCL (Oracle) announced that earnings were pretty much in line with their last guidance.  This didn’t do too much to the stock or the market in the after hours trading.  We’ll see if there is something on Friday.  [Speaking of ORCL, CEO Ellison has been accused by Harvard that he hasn’t given them the $115 million that he promised them last year.  Maybe he’s not so sure about his fortune after all—he has plenty of money.]

Be careful out there…

Dow Industrials:  11,019.11  -60.35
RYVNX:   22.13
RYAIX:  24.18
TLT: 83.59
BEGBX:  13.25

Wednesday, June 21, 2006

Market Warms Up on the Summer Solstice

Finally the stock market managed an upside day. One problem with it is that it felt like the End of something rather than the start of a big up move. Volume was subdued at best and prices kind of whimpered into the close. After trading up better than 150 during the late afternoon, a slow selloff preceded the close with the Dow closing up 104. That’s not the kind of ending the bulls wanted to see.

This rally still ranks right in there with just a little bounce off the lows, corrective in nature with Wednesday showing a very blowoff type close possibly to finish the corrective move. The rally on Wednesday gave mixed performances for the major indexes that we follow. The Dow managed to look relatively stronger than the broader indexes, which is not a bullish sign. The Dow has moved back above the magic 11,000 number. With many market watchers only paying attention to the Dow, the general feeling about the market could be very complacent, as has been the case for a while now.

We remain focused on the FOMC next week. Maybe we shouldn’t hang so much on that meeting due to all of the “tough” talk out of the Fed the past few weeks. By all accounts they should raise rates another (massive) 25 bps and say that continued vigilance on inflation is important. The only problem with that is the obvious change of heart the Fed could have given the various indicators coming out over the next few days in front of the meeting, such as Thursday’s LEI (leading economic indicators) and Friday’s durable goods. Then next week we have the two housing sales figures, new and “used” which Should show some weakness. What’s the Fed supposed to do?

If the Fed ever does give the notion that they are done raising rates, a pretty good rally could come out of it but we don’t know if that’s going to happen next week. As we get closer, we’ll see how the market is trading to get some idea of what we should be doing.

As far as the LEI coming out on Thursday, the expectations are for a drop of 0.5% which seems reasonable due to the market dropping in May.

Be careful out there.

Dow Industrials: 11,079.46 +104.62
RYVNX: 21.60
RYAIX: 23.88
TLT: 84.07
BEGBX: 13.37

Tuesday, June 20, 2006

Housing Starts Up?

The Commerce Department announced that housing starts for May rose 5%.  That’s a very interesting number since it is up.  We have to admit we are a little surprised by these government statistics.  Maybe you can help explain this.  There was some speculation on the issue in today’s media reports that said since prices have not fallen “much” that homebuilders are continuing to build???  

As for the market, it seemed to think the housing numbers were ok but for some reason there was a bit of a down draft during midday.  Early in the day the Dow was up about 80 points but went out only 32 points higher.  Breadth was negative and the market seems to still be oversold according to our momentum indicators.  What does this mean?

The market has dropped considerably over the past couple of months and now is trying to find a way to rally.  Each rally is still met with selling and there is no follow through.  This is a chilling reality.  The Fed has been jawboning heavily and the markets have responded with some selling but with next week’s meeting sitting out there, the market should be getting ready for good news from the Fed.  Just the opposite is true because now we are starting to hear that the Fed may have to go up another full point to six percent.  We find this to be an over reaction but it was out there in the news on Tuesday.

As for us, we are concerned that the market has not managed to bounce better off the lows and that the momentum indicators are weak.  We have said numerous times that the time a market gets oversold, a panic sell is possible.  There doesn’t seem to be very much concern in the market so we urge you to…

Be careful out there.

Dow Industrials:  10,974.84  +32.73
RYVNX:   22.31
RYAIX:  24.26
TLT:  84.05
BEGBX:  13.30

Monday, June 19, 2006

Fed Talks Tough Again

On Monday the stock market started out with a, well, let’s call it a whimper.  There was really nothing driving the prices at the opening.  About mid-day another Fed President, Atlanta based Guynn, called the long-term track of US budget deficits “unsustainable” implying inflationary pressures and implicating the government, not the Fed, for the problem.  This little speech did seem to put a bit of a dent in the otherwise dull day.  The market fell, with the Dow dropping about 70 points by the end of the day, ending below 11,000 again.  

Tuesday brings the first of several housing reports over the next couple of weeks.  This one is the May housing starts which were down 7.4% last month.  The sentiment on new home builders, measured by the National Association of Home Builders’ index for sales of new, single family homes, fell to a low point in June, the lowest since April, 1995.  The housing starts falling would not be a surprise to very many traders.  Likewise next week’s reports on home sales should be weaker but again these numbers may be baked into the market’s prices.

We find very little new to add after Monday’s trading except that the pattern of lower Monday’s generally is different.  The market seems to be waiting for next week’s news from the Fed.  The Fed seems bound and determined to Talk a tough game but do they have the courage to stay the course on higher rates.  We have said many times that the level of interest rates doesn’t mean the same thing it did twenty years ago.  Back in those days the Fed actually tightened up money to be tough on inflation.  These days, just the cost of money is going up, anyone can get a loan because there is plenty of money to go around.    

Be careful out there…

Dow Industrials:  10,942.11  -72.44
RYVNX:   22.29
RYAIX:  24.25
TLT:  84.19
BEGBX:  13.33

Sunday, June 18, 2006

Lots of News in the Next Two Weeks

Friday’s option expiration, or quadruple witching as it is called, didn’t show very much in the way of volatility or in volume for that matter.  The volume figures for the week were pretty strong but Friday’s was only in line with the rest of the week.  As for price action, the Dow was down 64 Cents while the Russell 2000 and the NASDAQ Comp were both down 1% on the day.  What we find curious is that our momentum indicators are still oversold even after the big rally we saw during the middle of last week.    

We see that the upcoming couple of weeks hold a lot of information that the market will need to digest, not so much this week but the following week does include the FOMC meeting.  Before we get to that data point, the market will get to see May housing starts and Leading Economic Indicators (LEI) and durable goods orders next week.  The following week brings May new home sales, May existing home sales, and consumer confidence before we get to hear from the Fed on the course of interest rates.  We will talk more about these data points as the come upon us.

We do remind you that the market is not paying much attention to the news of the day and no matter what the media may tell you, they don’t always know what the market is doing or why.  We don’t know what the market is doing but we try to listen to what it is trying to say to us.  Right now, we see that the rally has not pushed us out of the oversold position which leaves us thinking that the market can surprise on the downside.  We continue to say…

Be careful out there.

Dow Industrials:  11,014.55  -0.64
RYVNX:   21.90
RYAIX:  24.03
TLT:  84.31
BEGBX:  13.41

Thursday, June 15, 2006

Back Above 11K

And they come roaring back just as the bulls were about to give up.  Now, those bulls can rest easy again with the Dow back above 11,000.  We think that the complacency will set in fairly quickly and the volatility index was definitely showing that during the day as it dropped 25%.  We haven’t talked much about the VIX because there hasn’t been much to tell.  With the market trading down in the last few weeks, the fear factor did rise a bit moving the VIX up from around 12 to the low 20’s.  For Thursday, the VIX dropped from about 21 to about 15.5 indicating a big collapse in fear.

In yesterday’s post, we mentioned that the broader market would probably participate in the rally on Thursday and that happened, probably even more than we expected.  This is the kind of rally that is bound to occur in a bear market, violent and sudden.  

I think the key learning for these last few weeks is that the Media doesn’t always understand the why’s of the market.  As we mentioned yesterday, they were having a difficult time aligning the news with the trading.  This is where we need to be paying attention to the market, not the media.

The problem is that for most non-traders, this rally was tough to play.  You want to sit on your position on the main trend.  The market is now a very tough place to be playing anyway.  We would suggest that the path of the market is down even after a day like Thursday, even though the euphoria of the move kind of masking any bearishness whatsoever.  Make no mistake, the bear is back and right now is allowing a bit of an upward correction to give confidence to the bulls and fear to the bears.  

We will watch for another good point to sell into, but that may be tomorrow so…

Be careful out there…  

Dow Industrials:  11,015.19  +198.27
RYVNX:   21.59
RYAIX:  23.86
TLT:  84.50
BEGBX:  13.39

Wednesday, June 14, 2006

Core CPI Locks the Fed's Hand

The “Core” CPI reported out at 0.1% higher than the expectations but the market was strong at the opening anyway.  What was the media supposed to do???  Well, CNN Money online said something to the effect of the Market welcomes the end of uncertainty.  Yes, the Fed now has to raise rates but now we can look beyond this month’s rate increase and focus on buying again, since the rate hike news is behind us, truly twisted logic.  But, it works for the media on a difficult analysis day.  

The bond market finally realized that inflation might actually be a problem and went down fairly hard.  The bond market has held in there and actually advanced on all this media hype about the possibility of the Fed being Tough.  We noticed that the drop doesn’t come close to eliminating the past few weeks of gains—we will continue watching for further developments in the bond market.

The stock market managed to have a decent up day after getting hammered for the past several sessions.  Back on the first of June, the Dow closed at 11,260 and proceeded to drop seven of the next eight days closing at its lowest close in January at 10,706.  If we were to look that closely at the global markets we would see pretty much the same thing around the world, two weeks of very weak markets.  Even Wednesday’s advance was limited to very blue companies but we expect some expansion of those gains in the next few days.  The market is now going to tease the bulls into staying in their positions, convincing them that the correction is over and it’s time for a good rally.

We just don’t think the rally will look very good and we will be interested in adding to our short positions.  In the mean time, the precious metals have seemed to be bottoming in this area and we are really tempted to get on board.  We should have done something about getting into PAAS the last couple of days but have not, you know how that work thing gets in the way.  Plus, it’s difficult to dive into an asset that has lost about 40% of its value in the past ten weeks or so.  I guess we’ll wait some more.  If you must own something, the mining stocks are starting to dig in even as gold has dropped over the past few days.

Options expire this Friday (tomorrow) and we think the heavy volume this week is related to this event.  For those who had written covered calls, this was a nice month.  This expiration coincides with a nice little market bounce so we will see what happens on Monday.  

The stock market is only going to try to correct the declines of the past six weeks, it can not (I know those are strong words—maybe we should say it Should not) get back in gear to the upside.  The next couple of weeks will probably the last good time to unload stocks in preparation for the fall into the fall.

Be careful out there…

Dow Industrials:  10,816.92  +110.78
RYVNX:   22.86
RYAIX:  24.53
TLT:  84.99
BEGBX:  13.40

Tuesday, June 13, 2006

Global Markets Down Again

What a Day!!!  Let’s see if market logic, “tough Fed” logic, holds water today.  Before the market opened for trading on Tuesday, the BLS announced that the “Core” PPI was 0.1% higher than expectations.  Shortly into the trading day, the stock market was actually sporting pretty good sized gains with the Dow up about 70 points.  But, that was the high of the day.  [Near the opening bell, CNN Money had a headline that read “Fear Takes Hold of Wall Street”.  Of course, right under the headline were the green (positive) stock market indexes.]  From there the Tough Fed trade seemed to take over.  The Dow ended down 86 points on those interest rate increase fears we have been talking about recently.  No, 86 points doesn’t seem like much but the Dow is now down on the Year.

What’s your guess as to what happened in the dollar?  Yes, that’s correct the dollar was strong, across the board.  What happened to the precious metals sector?  Well, we’re glad you asked and we are glad we are out.  With the prospect of higher interest rates, precious metals don’t glitter as much and gold was down over $44 an ounce and, as I check it tonight, gold is down another $12 an ounce for a one day drubbing of $56 or about 9%.  But, the real story was in the silver, which was down 13% during the day and tonight is down another 4%.  We don’t think a 0.1% extra inflation for the month should make that much difference to gold but the Tough Fed trade was carried pretty far in these two commodities.  

What did the bonds do?  They were basically flat on the day.  

Getting back to the precious metals sector, we were extremely tempted to jump into PAAS during the day on Tuesday but work got in the way and by the end of the day we were glad not to be there anyway.  The HUI gold mining index we follow dropped 14 to 273 down 5% on the day.  Even though that is bad, it was no where near as bad as it should have been based on the drop in gold.  Looking to the True Contrarian, one of the links to the left, we see he is expecting a drop in that index down to about 248 which is still another 10% down from here.  We are still getting trigger happy with some of those gold stocks.  We are hoping to get in at some very nice prices.  That index, the HUI, traded at 401.69 on May 11th so with the close of 273.73 tonight, it has dropped 32% in little over a month.  Ouch and we’re glad not to be in these stocks the last month.

The reason you pay us here at the Wednesday Update is to provide clear thinking in the face of the stock markets gyrations.  We have been short the stock market for some time and in the last month, those trades have really paid off.  What to do now?  We think that the onus is on the bulls to provide a decent corrective rally so we can sell into it.  We are not prone to covering our shorts at the present time.  When we get closer to the Relaxed Fed trade, we will consider unwinding some of those shorts.  There is very little fear out there.  There may be a little angst, but no fear.  

As trading came around the globe to the US on Tuesday, there was significant global drops as the Japanese market dropped over 4% for the largest drop in a couple of years.  The rest of the global markets were red on the day (save a few) and most of them were down well over 1%.  There is some global fear and apparently in the precious metals, but the trading here in the US is calm and cool.  This is seen in the overnight futures being up again this evening as we write this.  Unbelievable!

Be careful out there…

Dow Industrials:  10,706.14  -86.44
RYVNX:   23.27
RYAIX:  24.75
TLT:  85.85
BEGBX:  13.38

Monday, June 12, 2006

Just Another Down Monday

The stock market disappointed the bulls once again on Monday as more selling dominated the late afternoon trading. The Dow made a new (relative) closing low and is trading near the February lows, down 850 points from its May high, right around 8% while the NASDAQ COMP is down almost 12%. I was informed today that the market isn’t in a bear market until the price drops 20% so we have a ways to go before we can declare that we’re in a bear market. To us, a 20% haircut to your portfolio is not what you need. And, while we don’t believe 20% will stop the bleeding this time, the market could be done going down just as it is being declared a bear market. Then you’d have to wait until the market went up 20% before you could really know it was a bull market. Not a very good way to go about it.

We were surprised by the lack of buyers on Monday. Late last week, it looked as if the market wanted to take a breather from the selling but Monday was a different story. The weakness in the broader market was masked by the relative strength of the Dow. With the Dow only being down 0.91%, the other indexes we follow were down more than that. The SP 500 was down 1.27%, the two NASDAQ indexes we follow, the Comp and the 100, were down about 2%, while the Russell 2000 was down over 2.5%. These are strong down numbers and leave the trap door in a precarious position.

The Dow and the SP 500 did manage Not to go under last Thursday’s intraday low but the NASDAQ Comp and NASDAQ 100 as well as the RUT (Russell 2000) did break below those key near term support levels. So, here we are with these indexes about to break out to the downside and…

Of course, in overnight trading the futures are up so there is apparently no fear again. The news during the trading day was that the Fed Head was going to be speaking on Monday evening and the market was nervous about what he might or might not say about the current boogie man, inflation, and what he might do to interest rates.

Well, in the next two days we will see what the inflation numbers, as brought to you by the Bureau of Labor and Statistics, a government sponsored bunch. We’ll just see what those numbers are and how they will affect the market in the coming days. It is clear that the market is weak, given its response to the modest buying opportunity that developed over the past few days.

The only real bullish opportunity will come, as a flash in the pan, as the Fed decides to stop raising rates. That news will get the juices flowing on the upside for a while until the dollar gets crunched on the news. At that time will be getting ready to move some funds into the mining stocks or funds. Today the HUI dropped a bunch but did hold last week’s lows. PAAS closed in the 16’s so we are getting ready. There is still some excess yet to be wrung out of the mining/precious metal group but we are getting very close.

Be careful out there…

PS Check out the article in the comment section from yesterday's post. Some technical analysis in the article but good reading. We were skepitcal about Thursday's V too but did think it could at least give a few days of sideways. Thanks for the info. (We did forget to mention that the Dow broke down through its 200 day SMA but we like to wait until the 200 day is turning over, which it is not, so far.)

Dow Industrials: 10,792.58 -99.34
RYVNX: 23.17 (above the October high)
RYAIX: 24.67 (new yearly high, highest since May13, 2005)
TLT: 85.79
BEGBX: 13.41

Sunday, June 11, 2006

Friday Was a Dud

After a stunning turnaround on Thursday afternoon, the market failed to show much follow through on Friday.  After all was said and done, the Dow dropped nearly 50 points after being only modestly higher in the morning.  But, of course, Monday brings a new week and fresh bullish notions.  

For our part, we think that the market made a nice momentum low back in May down around the 11,098 level in the Dow and Friday we got to see a lower price low down at 10,891 on Friday’s close.  Thursday intraday low was much lower, near 10,750 which could be a pretty good low for the time being.  Markets don’t generally go straight down and this one won’t either, at least as long as we are in the early stages of the decline.  Panic may come as the decline keeps going.

Right now, we need to focus on what is directly in front of us, the new week.  With all of this selling in the past month or so, the Fed wants to feel done with its rate hikes in sharp contrast to all of the rhetoric from them the last few weeks.  They are trying to look tough on the surface so the market is finally going down a bit in the wake of Fed comments.  

This week brings the two biggies for the Fed, the CPI and PPI.  You may recall last month when the Core CPI was 0.1% higher than expected and that drove the Dow down about 200 points.  This week expectations are for the PPI, out on Tuesday, and the CPI, due out on Wednesday, to show similar numbers both for the total and the Ex-Food and Energy number, you know the “Core” inflation.  Anyway, the total for both is expected to have risen 0.4% while the Core is expected to be 0.2% higher.  

We just don’t know what to expect this week.  The bond market has been moving up, a little weakly, but up, over the past week or so.  That could mean that inflation expectations are higher than the actual number or since the advance was weak the bonds could get taken down after a high inflation number comes out.  Like we said, we don’t really know what to expect.  

All we can say is that the market has lost its downward momentum and since the Thursday low it looks like it wants to show some sideways to up motion for a little while.  Until we can see some more definitive action, we will wait.  Yes, we still have our bearish positions but we aren’t sure this would be a good time to sell.  After Monday’s trading we will have a better idea.  The last few Monday’s have been down days which is unusual in itself.  

At any rate, we are looking forward to the next week of trading.  Options expiration may lead to some volatility this week so we are watching that, too.  But, if you are looking to sell into some strength, this may be a good week to do it.  We will be back again tomorrow to see how the week started.

Be careful out there…  

Dow Industrials:  10,891.92  -46.90
RYVNX:   22.26
RYAIX:  24.19
TLT:  85.72
BEGBX:  13.43

Thursday, June 08, 2006

Global Sea of Red

What a day!!! The way Wall Street closed on Wednesday left little doubt about the possible fire storm in New York on Thursday. That thinking process proceeded around the globe as Asia opened and followed all the way through Europe and the Americas. The early trading on Thursday seemed stronger than it should have given the global sea of red and that strength quickly dissipated with the Dow dropping about 170 points into midday. Then a magic wand was waved and the market turned around and moved into positive territory by the close, in the Dow at least. That’s a 350 point move down and then up. That’s called volatility and we have warned about this over the past several weeks. Of course, the market is trying to find a place to trade but in the mean time, the volatility is high.

Thursday’s volume was very heavy which normally could signal a big reversal. We are not so sure because the reVersal was not a very good V and prices barely came back to even. The advance decline numbers were fairly negative, meaning that declines outnumbered advancers. This doesn’t, by itself, mean that the V wasn’t a good one because it does take some time for the broader market to catch up to the large cap movers.

As we have mentioned on a number of occasions in the past few weeks, if the market wants to go down it will. Thursday gave us a chance to examine the situation again so here goes:

1) We did get to see some fear during the morning trading as prices plumbed some fairly low levels, prices not seen since February.

2) There hasn’t been nearly enough pain suffered in this decline. Everybody is waiting for the market to go back up and “save” them from having to sell.

3) The after hours market was a bit weak even with TXN announcement raising expectations.

4) Tonight’s reaction in Japan should be a powerful rally and they did move up around 1% early on but are now, as we write this, down nearly a percent on the day.

We remain bearish this evening because we know the pattern of the wave count allows for rallies. The market doesn’t go in a straight line; it tries to confuse as many players as possible.

One of the items we wanted to mention this evening is the market’s reaction to all of the Fed chatter going on the last few weeks. But, we saw the great article in Friday’s WSJ that you should take a look at. It’s called “Trading Shots” and the title of the article is “Does Ben Bernanke Have Street Cred?” We highly recommend this article to give you a sense of the way the world views the Fed.

Instead, we decided to concentrate on the stock market. The stock market is a dangerous place to be these days and there are fortunes being made and lost in trading days like Thursday. We are going to wait another couple of days to see if this rally can get some legs, although we still think a bigger break in prices is coming soon. Then we will see a rally after which there will be a big drop into the fall. Days like Thursday are just warm-ups for those days to come. So far, the fear has been well managed and there have been no breakaway gaps so it is highly likely that the market has Not entered the strongest down segment quite yet.

With all of this tough Fed talk, the dollar popped hard on Thursday and the precious metals have been getting pushed down at the same time. (We are anxious for the “Fed to be Done” raising rates so we can get into those mining stocks.) What is truly the calmest market is the bond market which has managed to hang tough ever since the weak jobs’ report on Friday.

Be careful out there…

Dow Industrials: 10,938.82 +7.92
RYVNX: 21.94
RYAIX: 24.01
TLT: 85.27
BEGBX: 13.43

Wednesday, June 07, 2006

How Low Can You Go?

Here’s the real question:  How far will the stock market go down?  Or, as in Limbo, “How Low can You go?”

The stock market opened strongly on Wednesday, to the tune of about 75 Dow points by midday.  Then something turned it down and the Dow moved down nearly 150 points from there to close down 71.  To be sure, there were enough Talking Fed representatives speaking about inflation, even the old Fed head, what’s his name again, oh yes, Greenspan was testifying before a Congressional hearing.  We want to remind you that the Bond Market has Maintained its gains since last Friday’s weak jobs’ report.  If the Bond Market hasn’t been spooked by the inflation talk, why is the stock market reportedly being spooked by it?

After Monday’s 200 point hit, the media was calling the bottom and then Tuesday reversed into midday trading but closed moving up.  Yes, the stock market was down on Tuesday but the close was well off the lows set earlier.  So, Wednesday was up and the media was proclaiming another bottom was set, only to see selling going into the close and the Dow finished below the magical 11,000 number.  The last few days of trading should have put some fear in the hearts of traders but we will see how Thursday opens.  Given that there is some angst after the close, we may see a down opening.  We don’t recommend buying this but at least it would show some fear.  

We would have thought Wednesday would have been an up day after the way the market closed Tuesday.  Wednesday’s trading goes to show you that when the market wants to go in a direction, you should not get in its way or try to play the other side for those corrective moves.  Now, we are wondering if there are any more brave souls out there to bring the Dow back to that magic 11K number.  

We mentioned in our last post that the pattern was not ready to go down but that quickly changed on Wednesday with the intraday reversal.  We remain firmly bearish as we think this first full run down to the first stop is far from over.  We tried to estimate that point in our Elliott wave discussion last week (look at the June 1 post) and we think that number in the Dow could be very close to 10,000.  Whenever that low comes, we will then estimate a good reversal which could take us back up to around 10,500.  After that we would not want to own Any stocks for several months.  For now, we are content to hold our positions and our cash (in the 401k’s where we have no short alternative).  

Thursday’s trading should tell us much about whether the market wants to go down hard right now or if it wants to wait another few days.  We’ll be back tomorrow to give you our opinion.

Dow Industrials:  10,930.90  -71.24
RYVNX:   21.84
RYAIX:  23.95
TLT:  85.10
BEGBX:  13.51

Tuesday, June 06, 2006

Another DOWn Day

Tuesday’s market tried to show a brave face at the opening but soon the indexes were down on the day, this after a 200 point drubbing on Monday.  The Dow dived below the 11,000 figure for the first time in about three months so there exists a lot of over head supply to contain any advance.  The day must have been difficult for those who thought that a rally should ensue directly after a 200 point drop.  But, after a 120 point additional slide in the morning the Dow recovered nicely to close just above the magic 11K figure right at 11,002.

The market weakness has been “blamed” on the Fed for being hawkish with their tough talk on inflation.  With that talk has come a realization by the market, justified or not, that the Fed may raise rates again at their June meeting.  Ok, let’s be serious here.  The Fed is boxed in and really doesn’t know what it’s going to do or what it should do.  

The dollar recovered a bit on the possible rate hike but was the market weak due to that news?  We aren’t so sure.  You may remember last Friday’s jobs’ report being weaker, much weaker, than forecast.  That report gave the bonds a definite boost but the Stock Market was flat on the day.  Shouldn’t the market have been up on that news, too?  What we’re saying is that the Fed doesn’t have as much pull in their rhetoric as one may think.

Well, the market has been weak and will continue weak for the better part of the summer and going into the Fall.  It’s that time of year when I get to drag that tired old cliché out.  What will the market do, what should I do?  These are questions that we tried to help you answer before the May drop.  Now that the stock market has dropped a bit, what should be done?  We suggest selling rallies.  Sometimes we will be able to feel them but with a weak market like this, they are not going to feel like much of a rally.  

The pattern in the market is giving rise to a modest rally right here after another little dip.  This rally could be somewhat stronger than we have seen for a while due to the point in the pattern.  But, make no mistake, this rally whatever it may bring will be followed by a very strong down wave that will take most by surprise.  This should be a violent decline but it probably won’t start for a few days.  The pattern has not fully developed at this time.  Please come back tomorrow and thanks for coming here today.

The precious metals sector sank again today on the stronger dollar giving us a possible test of the recent lows over the next few days.  The prices on the mining stocks are really starting to get interesting and we are back to watching them carefully for possible opportunities.  The index we follow is the HUI which traded over 400 about a month ago is now trading about 20% less than that at Tuesday’s close of 318.  PAAS has dropped to the low 18’s again and that might look interesting soon.  If we decide to make a move, we will immediately post those thoughts/actions in these posts.

Be careful out there…

Dow Industrials:  11,002.14  -46.58
RYVNX:   21.55
RYAIX:  23.79
TLT:  85.08
BEGBX:  13.55

Monday, June 05, 2006

Decidedly Down Dow

The Dow decided to get into gear on the DOWnside right from the get-go on Monday morning and ended the day off nearly 200 points.  We regret that we did not see one of the reasons for the opening weakness on Sunday evening.  Sometimes these things are difficult to find in the extremely bullish media.  Friday evening after the close—nice timing, don’t you think?—SPF (Standard Pacific) a home builder pre-announced that their orders were going to show a 40% year over year decline.  Now you know why we are so disappointed.  (You may not have seen that report either.)  

Anyway, the housing market continues to show that the real estate party has been over for almost a year now.  Looking at the stock of SPF, you can clearly see the peak in that company’s stock price, 49.70, last year on the Opening of trading on July 29th.  That coincides nicely with the peak of national home prices.  Yes, there are some pockets of strength in the country, like in Arizona, but for the most part the prices peaked last summer.  We have now begun to see the fallout from some of the drop in prices.  (Oh, in case you didn’t look at SPF’s chart, today’s close was 27.43, about a 40% drop in the price to match the drop in orders, poetic justice.)

Some could argue that there are other things going on but we have chosen to keep our eyes on the housing market to get a real sense of when the economy is going to tip over.  This is not a short term event; this housing peak is for many years to come.  The best we can say is that the real estate market is going to slowly, at first, move in the southerly direction.  Our theory is that the stock market will follow suit and today shows some evidence of that.

When we wrote our post last Thursday evening we were pretty convinced that Friday morning’s opening would be a good opportunity to sell.  By Friday afternoon, that didn’t really look to be the case but Monday, the bears have made a dent.  We see that overnight trading is firm so again there is No Fear in the traders.  Maybe the round number support is showing up this evening since the Dow is now near 11,000 again.

Whatever is going on now, we feel more convinced that we will see a drop in the prices over the coming weeks with intermittent bounces to take care of oversold conditions.  Feel free so sell any of those bounces, the decline is not over just yet.  In fact some scary things are going to happen as the market drops.  We have said that the position of the pattern of the market based on Elliott wave is very bearish and can lead to major gap down openings.  These should not be bought.  When we buy back into the market we will want to buy a gap down but we want it to be an exhaustion gap not a breakaway gap.

Be careful out there.

Dow Industrials:  11,048.72  -199.15
RYVNX:   21.49
RYAIX:  23.76
TLT:  84.68
BEGBX:  13.66

Sunday, June 04, 2006

Friday Jobs Disappoint

The Friday jobs’ report was quite a bit weaker than expectations, so what did the various markets do?  Before we start that discussion, we should probably mention what the news means—but you already know it means the Fed can back off.  So, the first market that comes to mind is the dollar, which, of course, was down on the back of that news.  The stock market based on the Dow was up a bit in the early going but failed to hold any of those gains.  The bond market thought the jobs’ news was great and popped at the opening and held its gains all day long.  Gold and silver were also pretty solid.

The Dow and other indexes opened on the high of the day and for the first few hours we were thinking that the next drop was becoming a reality—but that was not to be as the indexes managed to find a low in midday trading and then rallied modestly into the close.  The SP 500 was actually up on the day.

The new week holds some possible market moving information points such as the ISM Service index tomorrow which is expected to decline to 60 from last month’s 63.  Tuesday brings the retail sales index along with some consumer confidence numbers.  Wednesday has consumer credit and Friday holds the trade deficit numbers.  We don’t expect much movement off these numbers but if there is movement, these numbers may be hauled out as the “reason” for the moves.  

We still think the market is pining for a stop in the Fed’s relentless 25 bps rate increases that we have seen for the last 17 meetings in a row.  Their meeting (FOMC) will be held at the end of the month with plenty of time for further weakness in the data points.  We will keep watching and waiting.

We think the correction (of the down move we saw over the last month) is about over and we should be seeing some more decline in the market coming up soon. We really felt that Friday held a good chance to be the top of the correction but we may be disappointed.  We have learned that the market has a lot of excess liquidity built into it so there could be more rally to come—we remain short.  When credit standards start to tighten up, the liquidity brought to you by the incredible housing market will dissipate quickly.

Be careful out there.

Dow Industrials:  11,247.87  -12.41
RYVNX:   20.58
RYAIX:  23.24
TLT:  84.79
BEGBX:  13.69

Thursday, June 01, 2006

Prices Move Much Higher

The stock market made no time moving higher on Thursday as the “bad” news on the economy was good news to traders.  Yes, the not-so-tough Fed was hauled out as the reason for the rally after the jobless claims were more than expected and the April pending home sales dropped by 3.7%.  The May ISM business index fell more than expected and gave further reason to rally on economic weakness.  

The strength of Thursday’s market comes as no surprise given the pattern we have seen over the past couple of weeks.  The stock market is busy trying to correct the steep decline that took the major indexes down over 5% in about ten trading sessions.  We should be able to give three or four days to rally a correction.  

According to Elliott wave theory, corrections have three waves, A,B,C; A is up and B is down and C is back up again if we are correcting a down move, as is the case at this time.  Thursday’s trading certainly felt like a wave C as prices moved up and gave the impression of solid strength.  This leads us nicely into Friday’s trading, which begins with the jobs’ report.  

We think the jobs’ report is generally the pivotal point in the month, not always, but generally.  This report is coming at a perfect moment in time, after a perfect corrective move in the stock market.  No doubt, we could see a strong up move in the morning but equally likely is the possibility the market will just drop like a stone out of the gate.  

Either way, we give pretty good odds that this point in time is a critical point that needs watching.  To continue the Elliott wave lesson, the impulse wave is a five wave affair that is counted in a 1,2,3,4,5 pattern.  1 is down and 2 is up and 3 a strong down and 4 is up and 5 is down (for a down impulse move).  The 3 wave is normally the strongest wave and can give rise to gap openings.  The reason we mention this is that we believe the first down move we saw in the past few weeks was probably a wave 1 (impulsive down move) and now we may have just completed a wave 2 (corrective up move).  

Wave 3 is generally a multiple of wave 1 meaning more than wave 1.  Looking at the Dow, wave one was about 640 points so we could be looking at more than 1000 points down in a wave 3.  That is measured from the top of wave 2 which could be around 11,300 taking wave three down to 10,300.  We believe this move could happen over the next two to three weeks.  We will know more after Friday’s report and the stock market’s reaction.  Hold on to your hats.

Be Careful Out There…

Dow Industrials:  11,260.28  +91.97
RYVNX:   20.46
RYAIX:  23.17
TLT:  83.71
BEGBX:  13.53