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

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