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

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