Monday, July 31, 2006

Dull Last Day of July

The last day of July has yielded little in the way of new information for us.  The stock market basically took the day off especially after the big Friday rally.  Our indicators are still showing an overbought market and we expect that the next few days will bring small if any upside price increases.  

There are a few news items on tap for Tuesday that we have mentioned in the past couple of posts.  The July Challenger layoff report, something we haven’t discussed here before, is due out well before the market opens.  This report indicates mass layoffs at larger firms that were announced in July.  About an hour before the market opens, the June personal income and spending numbers will be available both expected to rise about the same as last month.  About a half hour after the market opens, we get to see the numbers we want to see, the June pending home sales.  Also at that time are the June construction spending, expected to be up 0.3% compared to last month’s decline of 0.4%, and the July ISM manufacturing business index.

These numbers do have some significance due to the “data watching” Fed.  The Fed is trying to hold rates level next week when it meets so they are crossing their fingers and toes that the data allows them to hold firm.  We put a rate increase next week somewhere between “no way” and Dumb and Dumber’s “so you’re telling me there’s a chance” of one in a million.  Okay, maybe we need to be a little more open minded about yet another rate increase but the Fed is definitely concerned that it has already gone too far.  This is notwithstanding some of the recent tough inflation comments.  

We are in the camp that thinks whatever the Fed does or says next Tuesday will be largely sold by the stock market.  Meanwhile, the dollar will probably not like news of no rate increase.  As we have seen for the past few days, the dollar has been a little weaker suggesting it believes that the Fed is Done.  Since the stock market has had So Many “Fed is done” rallies, we just don’t think there will be much of one on that news.

Nothing much went on Monday so we’ll be back tomorrow for a recap of whether or not the news items of Tuesday can move the market.

Dow Industrials:  11,185.68  -34.02
QQQQ:  37.10
RYVNX:   23.47
RYAIX:  25.02
RYCWX:  42.81
TLT:  85.80
BEGBX:  13.58

Sunday, July 30, 2006

Bad GDP Equals Good Stock Market

The stock market charged ahead on Friday on the “good” news about the second quarter GDP, which was less than expected and less than half of the first quarter’s number. Of course, the reason it’s “good” news is that surely the Fed can stop raising rates with all the negative news out about the economy. We’re wondering how many “Fed is done” rallies the market can produce, especially since the Fed hasn’t actually stopped raising rates. We’re also wondering why a poor GDP number is supposed be good news. Such is the twisted logic of the stock market these days.

One thing we noticed is that as strong a day the market had in terms of price, the volume was not as strong as you would like to see given the magnitude of the price move. This is typical of a corrective wave, which is what we think. The other item of note is the QQQQ’s price action. We notice that the big move up has left the QQQQ’s Below their June LOWS. So, the bulls are getting all lathered up for a big move but the overhead supply is going to very heavy. (Editor’s note: Overhead supply means that a lot of stock has recently traded at prices above the current price and those owners want to get out even. When the prices get back to where they bought, they will become sellers and create a supply ceiling.)

As you know by reading previous days’ posts, we have gone short again after a little bullish period. We were expecting a rally to take us into this week and then we were going to reverse course but we went early…again. This means that we were pinched by the big Friday, bad GDP number, 37th “Fed is done” rally. As it stands this evening, we are ok with being short again but we could have had better prices Friday. Since you didn’t have a crystal ball when we turned course you could have gotten better prices for those inverse funds than we did. We do still have some dry powder to take advantage of any further price increases this week.

Barron’s reminded us this weekend that the NASDAQ Comp index crossed 2000 for the first time back in July of 1998 and right now that index is trading just above 2000. The point of the article was that the NASDAQ was supposed to be all of the companies in the great growth engine but here we are after a round trip from 2000 to over 5000 back to 2000 and what have we got to show for eight years—no price increase.

The upcoming week offers the jobs’ report on Friday which to us is the biggest event of the week. Tuesday is filled with new data, with the most important one to us being the June pending home sales. We continue to watch housing for clues to unwinding of the great credit bubble.

The last item on our minds is the position of our short term momentum indicators. They are generally overbought as of Friday. One of our favorites is the 5 day upside volume indicator which is near all time highs and signaling at least a minor pullback. Our oscillator just jumped to overbought on Friday. As we start August this week, we want to position for the minimum long exposure to the market as possible. The market has a great distance to go down in the next six to ten weeks and we want to at least get you out of your long positions. We recommend hiding in cash for the next couple of months. Your 401(k)’s will thank you in September.

Dow Industrials: 11,219.70 +119.27
QQQQ: 37.11
RYVNX: 23.43
RYAIX: 25.00
RYCWX: 42.54
TLT: 85.70
BEGBX: 13.55

Thursday, July 27, 2006

We Reverse Course

Where do we start?  After yesterday’s post, we began looking for strike three and we think we found it Thursday morning when the market popped up at the open.  The Dow was up about 80 in three seconds flat right after the opening bell and then traded around there until just after lunch when the gains of the day quickly evaporated with the Dow ending down about 2 points on the day.

Over in our favorite index, NDX, there was a spurt at the opening that completely erased the last hour drop on Wednesday.  About fifteen minutes into the day the index peaked and headed south for the better part of the day until a rally picked up the index at the close.  We decided to exit our QQQQ long position as the market was coming off its morning highs.  Had we been watching the market we would have sold into the early rally but we necessarily had to trade a little later.  We still were up on the day on our sell and up about 2% for the we(a)k we were long.  We will probably regret our decision to get out of our long but later in the day we put our RYDEX inverse fund trades back on to make it even more painful if we are wrong.

We like our little recognitions that the market gets stronger at the end of the month and that it needed a rally after a week ago Tuesday’s lows and that it should have been for longer than seven trading days but…we can’t follow our own thinking.  The market seems to be saying it’s time to turn out the lights.  We could be wrong but the market looked as weak Thursday as we have seen in a while.

The market was oversold going into our Tuesday low last week and now has managed to crawl out of that oversold condition.  Much energy was spent on the seven and a half day rally but little was accomplished.  The over performing Dow was unable to get back to its high of a month ago and has had early morning highs that faded during the afternoon.  The NDX has just Not performed like it was going to go up from here.  

At any rate, we took the QQQQ long off the table and brought back the Rydex inverse funds.  We split our holdings into the NASDAQ 100 and the Dow 2 times inverse funds.  We have felt that the Dow would not go down as much as the NDX for the first half of the year which is why we were in the RYVNX which is the 2x NDX inverse fund.  Now, we think the Dow can match the down side performance of the NDX so we bought some RYCWX.  We are deeply in the bearish camp with our assets.  If the market decides to go up we will be in need of assistance, we’ll let you know.  You say, you won’t be home, that’s too bad, it’d be nice to see you.  Anyway, we will know soon, I’m sure.

Dow Industrials:  11,100.43  -2.08
QQQQ:  36.35  (out this morning)
RYVNX:   24.46  (in this afternoon)
RYAIX:  25.54
RYCWX:  43.42  (Dow Inverse fund—in this afternoon)
TLT:  85.21  (still in)
BEGBX:  13.48

Wednesday, July 26, 2006

Strike Three?

Let’s start with our favorite index the NDX, the NASDAQ 100, and its tracking stock, the QQQQ’s.  This is now the sixth full trading day since our “important” low back last week Tuesday and there has been very little power for this index.  Out of the Tuesday low we saw a good rally into last week Wednesday’s high much more muted than the reaction in the Dow.  Going into last Friday, the index quickly traded down near its Tuesday lows but did manage not to break them.  Starting on Monday we have seen another rally to those Wednesday highs from last week.  

In case you weren’t reading that very closely, we think that this “pattern” represents a possible end to the upward correction of the NDX.  The first leg up into last week Wednesday was the “a” wave and then the pullback into Friday was the “b” wave and then this week has been wave “c”.  A three wave pattern is corrective and in this case signals the correction may be over.  Strike one.  

We have felt fairly confident in our position that the NDX needed to correct an oversold condition.  Looking at the Dow, we see a similar pattern but the magnitude of the upward correction has been significantly better.  By definition, this pattern difference in the two indexes is bearish since the Dow is “out performing” the broader indexes.  Strike two.    

We can only say that corrections are dangerous to play and we have had ample opportunity for the bulls to get a little serious about rallying the NDX.  In the context of the entire market, the bear doesn’t seem to be letting up much even though the headline number, the Dow Industrials, has been showing stronger numbers.

Underneath the surface a lot of bad things are going on, one of which is the Dow Transports which we mentioned yesterday.  After UPS’s news on Tuesday, the Transports got hammered by 80 points and by nearly another 125 on Wednesday.  This index is down well over 4% in two days but no one ever really watched the Transports so it doesn’t really matter—right.  

The tech news is punishing many investors if you look at some of those stocks.  We think of AMZN more as a tech due to the way it interacts with the customer and it was down over 20% on Wednesday after its news on Tuesday evening.  Looking through the list of NASDAQ 100 stocks there are several with 4% plus declines for Wednesday, make that 10 or 10% of them.  

Probably the biggest “news” of the day was the Fed’s beige book which was, how shall we say this, Flashing subliminal messages about the course of interest rates.  After that report, there can be little doubt that the Fed is preparing the market for at least a pause in the interest rate hikes when it meets on August 8th a couple of weeks away.  This Big message from the Fed was Meant to give the market a chance to rally without the Fed actually being able to say they were pausing.  But, the dollar did not like the news as you might expect (check the BEGBX below and compare it to yesterday’s number).  Not only that, the stock market couldn’t hold its gains into the closing bell.

We leave you with this tonight:  The market could very well have completed its upward correction on Wednesday or may do so on Thursday morning.  Normally, this time of the month is the strongest but we have not seen the strength we thought we’d see in the broader indexes.  We thought the NDX and friends would out perform to the upside relative to the Dow.  That has not happened so we have become very cautious in here.  We thought we could wait until the middle of next week or even later but our senses are on full alert.  The Asian markets are up this evening and pulling the US overnight futures up a little in the process.  Please review your positions.  We’ll be back again tomorrow for more information.  See you then.

Dow Industrials:  11,102.51  -1.20
QQQQ:  36.59
RYVNX:   24.15
RYAIX:  25.37
TLT:  85.34
BEGBX:  13.45

Tuesday, July 25, 2006

UPS Slams Transports

Monday night’s news on TXN didn’t mean much for the stock market on Tuesday morning.  In the Dow, MMM, 3 M, started the day out with a big miss on earnings that the market punished with the stock down 5% on the day.  MMM had been hit about a month ago when it pre-announced and now it is down about 20% from its May highs.

Over at UPS, the United Parcel Service, there was some more bad news.  UPS announced disappointing results because it had to pay too much for fuel as well as the effects of a slowing economy.  The stock took a big 10% haircut today leading the Dow Jones Transportation index to a 1.76% loss.  We have questioned the logic of these transports just continuing to go up in spite of increasing fuel prices so today some of that logic is being realized.  

The rest of the market traded sideways for the better part of the day with a good sized spurt the last hour and a half of the day to show some positive closing prices.  This happy close was not greeted very well by the after hours news with AMZN announcing dismal earnings.  The stock got smacked for 10% after that news.  So, while the QQQQ’s we own did have a nice up day, the after hours took it all away.  We can only imagine what the trading day will be like on Wednesday.  

We did see the existing home sales fell again, as expected, last month.  That makes eight in the last ten months that home sales have fallen.  And, as sales have fallen, inventories are rising, this month to a new world record 3.725 million units.  This represents a 6.8 month supply using June’s pace.  Last June (2005), the supply was only 4.4 months.  On top of that, prices, while still rising, only rose 0.9% from year ago levels, the smallest year over year gain since May 1995.

The Fed is not doubt monitoring the economy and will take note of the important news items of this week especially the first estimate of second quarter GDP growth.  Current estimates come in at a modest increase of 3.2% with some forecasting even less for the third quarter.  The big Fed meeting is on August 8th and will provide some entertainment for a few minutes at least.  Yes, it is a few weeks away but we are at a point where the Fed Has to stop raising rates and the market knows it.  Any further weakness that we see in the other news items like the durable goods orders or new home sales on Thursday will cause them to relax and enjoy the ability not to raise rates again.

We are thinking that the current rally can continue until about then but we are looking more at the July jobs report that is due on Friday August 4th.   We’ll fine tune our thinking as the days go b(u)y—ok, not funny because we are not sure that with the weakness we are seeing in some of these stocks whether we will actually see a rally or if the train wreck will show up first.  We are still long the QQQQ’s.

Dow Industrials:  11,103.71  +52.66
QQQQ:  36.62
RYVNX:   24.08
RYAIX:  25.34
TLT:  85.03
BEGBX:  13.35

Monday, July 24, 2006

Barron's Says "Time to Buy"

We opined last week that the stock market may have put in an important low on Tuesday and then it rallied strongly on Wednesday before falling for the next two days.  In that fall, the indexes we follow did not fall through those support areas created on Tuesday.  That left Monday to complete the picture and the stock market was up about 2% for the day showing at least a near term bounce off those new lows from last Tuesday.

The stock market seemed compelled to go up on Monday.  Even BARRON’S was bullish with a front cover that said “Time to Buy” in Bold print and large font.  The picture on the front cover is of a bull blowing up a bear with a large stick of dynamite.  Pictures like that always bring out the contrarian in us and this time we think there will be a major bull trap during this rally.  If the bulls were on the verge of selling their positions, the 200 point up days should calm them down.  We don’t want them to actually sell just yet; we will be looking for a nice rally here and have it fail as we go into the middle of August and Then have them sell and become good little bears.

Don’t forget, this is the “Fed is done” rally and news to that effect will push the market up.  For instance, Tuesday’s existing home sales could support the Fed or not.  We also get to hear about retail sales and consumer confidence, both of which have the potential to push the market one way or the other.

For now we are content to hold some QQQQ’s long but one of the reasons we bought them is to be able to sell into morning strength if and when we get it.  That same day we may be able to jump back into our inverse funds.  At least that’s the current plan.

This evening brought earnings “good” news from TXN, Texas Instruments.  The stock was up 3% during the day and then another 4% after the announcement after hours.

We found it interesting that an analyst at Citigroup raised DELL to a Buy from a Hold and moved their price target to $28 from $24, this despite last Friday’s earnings warning from DELL.  While we don’t subscribe to the $28, the market did seem to like the news and popped the stock 4% on the day.  This is the type of thing that moves the market and we don’t see this being a fundamentally strong thing.  With the stock under extreme pressure and dropping to a multiyear low, there is still reason to sell this stock.  These little pops in the price are consistent with a stock that is going down.

Dow Industrials:  11,051.05  +182.67
QQQQ:  36.41 (we own this)  
RYVNX:   24.32
RYAIX:  25.46
TLT:  85.28
BEGBX:  13.41

Sunday, July 23, 2006

Bullish Angst

The stock market decided to go down some more on Friday, adding to our angst about whether it wants to go up or not.  We held our long positions through Friday and will be especially watching them to see if the market really doesn’t want to go up for a few weeks.  When you see the extreme pressure exerted by the sellers (bears to us), there really seems like no upside coming at all.  

After Wednesday’s strong advance on the back of the good Fed Chairman’s dovish speech (dovish on interest rates), we did think there would be a little pullback followed with a nice rally that would allow us to reestablish our short positions.  Again, we look at the headline Dow Industrials and see that index not being hit as hard as the NASDAQ indexes we follow.  For example, for the week, from Friday’s (14th) close to Friday’s (21st) close, the Dow was up 129 points while the NASDAQ Comp was Down about 17.  So, roughly the Dow was up about 1% on the week and the Comp was down about 1%.  

Yes, we seem to have gotten to cutesy on our trade for the week but we still think there may be some upside this week.  If no upside comes to relieve the bull’s pain, there will be some significant selling sooner rather than later this summer.  The market will not be kind on the next downswing, which is why we would like to see a little rally for you to sell into and for us to take up our short positions again.

Last Friday was options expiration and there may be some overreaction to that.  Volume (NYSE) was the strongest of the month most likely due to the expiration.  Monday will bring us some answers to our questions but the next two weeks are going to be filled with opportunities to Make Mistakes.

We do have some interest in the list of news items for the upcoming week.  With Tuesday bringing us the June existing home sales and Thursday the new home sales, we will be looking forward to those reports.  Thursday also brings the durable goods orders which we like to follow but the market tends to shrug off.  We have noticed the media recent efforts to try to down play the housing sector’s influence on the rest of the economy.  Maybe the stock market is listening, maybe not.

Dow Industrials:  10,868.38  -59.72
RYVNX:   25.35  (too cutesy)
RYAIX:  26.00
TLT:  85.33
BEGBX:  13.47

Thursday, July 20, 2006

Fairly Deep Correction

Maybe the Update was too cutesy a couple of days ago when we decided to unload our shorts and realize some gains for the year, because the stock market had trouble maintaining its ground on Thursday.  The headline number of down 83 represented by the Dow Industrials showed a pretty good day relative to Wednesday’s 212 point explosion.  The NASDAQ Comp didn’t fair nearly as well by falling more on Thursday than it went up on Wednesday.  Tech weakness followed some quarterly earnings reports that forced some stocks down fairly hard.

As you probably know by now, the NDX, NASDAQ 100, is our favorite index along with the QQQQ, the ETF that tracks the NDX.  This index dropped more on Thursday than it went up on Wednesday, too, but we look at the lows of Tuesday for comparison.  That low was about 1448 and we compare it to the high of the move which was about 1496 or about a 48 point move up.  Using our Fibonacci ratio for a natural corrective move we would multiply by 0.618 (times the 48 point up move) and come up with about 30 points.  Now call me crazy but that would mean the Fibonacci prediction for a low in the correction would be 30 points down from the 1496 high which is 1466.  You might ask, “What did the NDX index close at today?” and we would have to say 1466.  

Does that mean the correction is over?  Well, not necessarily.  The correction is only over if the market stops going down.  So, will it stop going down?  In the after hours market, there were some interesting developments, the first being the GOOG earnings report and the second being the MSFT announcement of a $20 billion share buy back before August 18th.  Both of these seemed to bolster the market at least a little.  Don’t get me wrong, the market was very ugly on Thursday and the selling only stopped because someone rang the bell to close the trading day.  There are No assurances in the market, anything can happen.

Our position is that Tuesday’s lows are fairly important and, if broken, will probably usher in some very serious selling.  But, we are long the QQQQ’s and bought more today because we think the market will rally into the early part of August.  We are willing to change our minds because we are not committed to this position.  We are much more interested in the larger drop after this first drop gets corrected.  What that means is that we think the low point on Tuesday will provide a good bottom and we will correct this large drop from the January highs in the NDX.  We aren’t sure but the 1761 high down to the 1448 low is a nice 313 points.  A typical 0.618 Fibonacci retracement/correction would be 196 points bringing us back up to 1641.  We do not expect such a large correction but the 0.382 Fibonacci number (1-0.618=0.382) would get us back to 1550 which would be a spot to look for an end to the corrective move.

We apologize for the heavy tech talk this evening but we are trying to see if the market is behaving normally in the Fibonacci world and tonight it seems that it is.  We would start getting a little suspicious that the rally wasn’t going any further if we didn’t see some upside on Friday, especially if the market could break the Tuesday lows.  These are just guidelines, not really rules (any Pirates fans out there).

Have a good weekend.  

Dow Industrials:  10,928.10  -83.32
QQQQ:  36.08
RYVNX:   24.83
RYAIX:  25.72
TLT:  85.49
BEGBX:  13.39

Wednesday, July 19, 2006

Impressive Rally

The stock market staged an impressive rally on Wednesday with the New Fed Chairman as the lead cheerleader.  The Chairman said that the economy is cooling, hooray hooray, oh wait a minute, and that should cool inflation, now, hooray hooray.  This speech was just after the CPI numbers were released showing a bit higher inflation than the market wanted to see.  The housing starts were announced about the same time and they were weaker than expected so the market was somewhat confused.  It did enjoy the Fed Chairman’s speech and was off to the races after that.  

We, of course, were happy to be out of our short position for today’s rally, but the Dow was the out performer today up 1.96%, not the NASDAQ (up 1.83%) or the SP500 (up 1.86%).  We follow the NASDAQ 100 (up only1.24% most likely due to YHOO which was down 7% by itself) which was not up nearly as much as those three.  

Wednesday’s rally certainly came out of the blue, big blue, with IBM leading the charge a bit.  But seriously, this rally was big in the Dow and now we need to wonder how far this can go.  With options expiring this week, it is little wonder that the market is up, too many people caught on the wrong side of their options trades.  In order to make up for that, they buy stocks.  

Again, we need to focus on the near term of the market.  We think this rally could carry until early August at which time we will be all over the short side again.  We don’t know how much room we have to allow for the rally but a 200 point start is pretty strong.  We will keep our eyes on it for further clues as to when to sell.  The volume was not particularly strong given the 200 points so maybe the Dow got a little ahead of itself.

This is the rally that is being caused by the Fed stopping its rate hikes.  The dollar got hit hard and precious metals bounced.  Bonds were strong and completely erased Tuesday’s losses.

We’ll be back tomorrow night.    

Dow Industrials:  11,011.42  +212.19
RYVNX:   24.06
RYAIX:  25.31
TLT:  85.24
BEGBX:  13.36

Tuesday, July 18, 2006

We Exit Our Shorts For Now

Tuesday’s market probably completed a move down in the NDX, NASDAQ 100.  As we look at the chart from early January to today we see a good move down from the high.  Back on January 11th, the NDX traded as high as 1761.46 and today it traded down to 1446.77, for a drop of 314.69 or 17.8%, not bad for a first move down.  The move up started on October 6, 2002 at 795.25 and we think it finished at the 1761.46 high in January.  Of course, you could have participated in most of the move down had you climbed on the RYVNX in early May.  When the NDX was 1715.23 on May 8th, the RYVNX closed at 18.17 compared to the January low of 16.99.  Today’s close stands at 24.66 for a very tidy profit from either of those two points.

We have been talking about the possibility of getting out of our positions for a short term low and then getting back in when prices are a little better.  We mentioned not getting too cutesy about this trade and wondered whether it was such a good idea.  Well, after the market closed on Tuesday, YHOO disappointed and dropped about 14% in after hours trading.  We do know how this tends to work as the market could open a little weak in the morning and rally from there.  There is the little matter of the CPI coming out just before the market opens on Wednesday.

The positions we take don’t always work out and because of this we always recommend a lot of caution with our ideas.  Right now, we are trying to set our sights on the jobs report due out in a couple of weeks.  We are hoping to see a little bounce out of today’s lows in the NDX.  IBM did have some decent news after the close as well and it was slightly better and received much better than the YHOO news.  Tomorrow we’ll see what will happen.

We do Not recommend this but we did take a long position today so we are slightly bullish over the very short term.  This huge drop we’ve seen in the past couple of months could have a nice corrective bounce and we would like nothing more than to take a little of the upside into our pockets.  Again, we don’t think you should try this at this time due to the short term nature of this trade but if we do get this rally over the next couple of weeks we would recommend you sell what you have left.  The fall lows will provide us a nice opportunity to get long again.

To follow up on gold, it was down again today.  After trading up to $675 on Sunday night, we see it at $630 this evening.  The interesting thing about this gold move is that, if you look at the HUI, you see that it peaked about two weeks ago.  Gold peaked on Sunday night.  The stocks lead the metal, generally.
Dow Industrials:  10,799.23  +51.87
RYVNX:   24.66  (out here)
RYAIX:  25.62
TLT:  84.44
BEGBX:  13.24

Monday, July 17, 2006

Gold Produces Outside Down Day

The stock market started the week out by doing basically nothing with the Dow up 8 little points.  The broader market didn’t match up as the decliners out numbered the advancers on the NYSE.  The NDX, NASDAQ 100, did trade higher for some reason and we need to keep our eyes on that index for signs of a short term low in the stock market.  As of this evening we are not willing to get out of our position but we don’t want to get cutesy either.  We need to focus on the lower, much lower, lows that will be had in September or October.  Sometimes we like to try to time things a little too much but we don’t want to miss a good trading opportunity.  

The big move of the day came in the gold market as gold issued a major sell signal today with the outside down reversal day.  An outside down day is most important when it happens to end a move in one direction or the other.  We describe the nature of an outside day as one that trades higher than yesterday’s high and lower than yesterday’s low.  In this case, the outside down day, trading starts out very optimistically higher besting Friday’s high and then trades down the rest of the day to close below Friday’s low.  

Gold traded as high as $667 on Friday and in Sunday night trading went just over $675 and then collapsed to $640 in late afternoon trading on Monday.  As we write this, gold has recovered a bit to about $652 but the peak has probably been seen here for a while.  The pattern in the metal is not pretty as this latest peak is well off the nearly $725 high set right at the time the stock market was peaking in early May.  This failure to reach back to the peak is in lock step with the HUI and is very bearish near term.  

Tech talk:  For those of you who want to watch Fibonacci in action, this may be your best opportunity.  The $725 high set in May is followed by a strong drop into the June lows near $550, this is wave one.  Then, we see gold rallying to Monday’s (Sunday night’s) high of $675, wave two.  A good guess at the Wave three is a 1.618 multiple of the wave one move and measured from the Wave two high, like this:  Wave one is $175 from $725 down to $550.  Multiply $175 by 1.618 to get about $280 and this $280 is the drop expected in this next move from the wave two top of $675 or $395.  Doesn’t seem possible, does it?  Well, even if we are only talking about a move down equal to the wave one drop of $175, we are still looking at $500.  

Tuesday brings the Producer Price Index (PPI) and consensus is up 0.3% with “core” PPI up only 0.2%.  Normally, the PPI is not as big a market mover as the CPI but we are willing to watch this number on Tuesday.  The CPI will be out on Wednesday and expectations are for a 0.2% rise in both the base and the “core”.  We are really waiting for the housing starts number due out on Wednesday.

If you haven’t checked out the Elliott wave free week, you have one more day to get some valuable analysis for the price of signing up for it.  We recommend reading the July Financial Forecast and the Short Term Update (STU) on the subscriber’s page.  Tonight’s Short Term Update shares a tidbit that we found interesting:  “…the September S&P futures contract has closed down the week of July 14 to July 21 for the past 10 straight years…”  This comes from the Supertrader’s Almanac ( by Frank Taucher.  We don’t really follow these types of things but do find it interesting.  

Dow Industrials:  10,747.36  +8.01
RYVNX:   24.79
RYAIX:  25.68
TLT:  85.17
BEGBX:  13.26

Sunday, July 16, 2006

July Options Expiration Week

The stock market fell again on Friday putting the three day drop in the Dow at nearly 400 points.  Meanwhile the other indexes we follow have fallen also.  Our main index is the NASDAQ 100, NDX, where we have substantial positions in the Rydex inverse funds based on this index.  The index has been leading the charge lower since January and we may finally be seeing the other indexes come in line with the NDX.  

We are cognizant of the potential bounce the NDX may exhibit here.  This week is options expiration week and with it there may tend to be a bit of volatility.  During the week we also have several fun numbers coming out like the PPI and CPI on Tuesday and Wednesday, respectively, and the June housing starts on Wednesday as well.  

If you have taken some time to look over the Elliott wave website, you have seen some very good analysis including analysis on the NDX.  They show a very important chart that has the NDX pretty much completing a five wave decline, which is normally followed by a three wave counter trend rise.  We are considering exiting our position in the Rydex funds this week and waiting until the rally plays out and get back into these positions going into the early part of August.  We will let you know.  Our position has been in place for a while now and we have a very nice profit in the RYVNX.

If you haven’t looked over that website, you should and take advantage of the wealth of Free info available until Wednesday afternoon.

[Editor’s note:  Out of necessity, we just post a quick note this evening as we have been out of town and weren’t able to return to do a full posting.  We apologize for the lack of info this evening but we will be back tomorrow for a full report.]

Dow Industrials:  10,739.35  -106.94
RYVNX:   24.98
RYAIX:  25.78
TLT:  85.04
BEGBX:  13.40

Thursday, July 13, 2006

Possible Breakaway Gap on Friday

Tonight, as we write, the futures are actually down quite a bit, predicting a lower opening in the morning.  This hasn’t happened very often recently and it shows some capitulation by the bulls.  We think this is an important topic this evening as we have shared this type of thinking in the past and tonight a possible moment is occurring.  

In order for the market to decline as much as we think it will, there needs to be some big down days.  These days generally come when there is recognition of a trend change like we have seen over the past few weeks.  For most of the spring we have said to sell in May and go away and the earlier in May you would have sold the better.  But, right now, the rest of the world is starting to feel the significance of the move that’s happening.  

Thursday was a very telling day and it wasn’t very difficult for anyone to tell what was happening.  First, there was a good sized drop in the first hour or so of trading followed by a spirited rally that actually took the NASDAQ 100, NDX, green for a few minutes.  After that the market started to free fall again into the close, with the NDX closing basically on the low for the day and down 23 points.  In the overnight futures market, the NDX futures are under fair value by almost another 10 points.  

We are only too happy to be in cash with most of our funds and in the Rydex inverse funds with the rest except for some TLT fund.  We hope that you took the opportunity to unload most of your stocks in the past few months.  We are going to stop telling you to “be careful out there….” because the time for being careful is over.  

We want to remind you that it is FREE WEEK over at Elliott Wave International.  Just go to this website and sign up for their free information.  This is free until next Wednesday afternoon so hurry and take advantage of it:  

So, we have seen the True Contrarian’s point of view and now we see similar views expressed from Elliott Wave International that the market is about to drop about 25% going into the fall or early winter.  On Thursday, the market shared that same information with us so I think we are safe in assuming the fall is coming.

We suggest sitting on the sidelines of most investments, particularly stocks, until we see some reason to venture back into the water, which shouldn’t be until late in the fall.  We may have some opportunities in the mining stocks earlier than that or some other class but for now, cash is king.  Of course, we do have positions in the Rydex inverse funds to take advantage of the near term drop.  If the NDX drops by some 20% the RYVNX will go up about 40% and the RYAIX will go up about 20%.  Go team.

Have a great trading day and a good weekend.

Dow Industrials:  10,846.29  -166.89
RYVNX:   24.43  (another 52 week high)
RYAIX:  25.49   (another 52 week high)
TLT:  84.99
BEGBX:  13.41

Wednesday, July 12, 2006

Not Pretty

That was not pretty, even the media didn’t like it.  As trading began on Wednesday, the market had to deal with a few minor pains.  One of those, near and dear to our short tech hearts, was the downgrade on DELL which pushed that stock down over 4% by the end of the day.  Another was the news about the trade deficit widening, although that was less than expected; but, within that report was the fact that oil imports reached a record $28 billion up $4 billion from the prior month, 17%.  Don’t forget that this is May’s number and the report we read said the price of crude was just over $61 a barrel.  As you probably know, the price of oil is well over $70 a barrel now.

The stock market just went down and down all day long.  The NASDAQ indexes were hit hard with the DELL news.  At the end of the day the NASDAQ 100 index had broken through last October’s low.  This move pushed our Rydex inverse funds up to new 52 week highs on Wednesday as noted below.  When the indexes break through important lows like that, some pain is felt but there was no news story that pointed it out as far as we could tell.  The other indexes we follow have not broken their respective October lows but we believe it’s only a matter of time.

Over the next several weeks we expect the stock market to continue its decline but there will be rallies to confuse the traders.  This is only natural.  Our best guess is that stocks will decline and Treasury bonds will move up (rates will decline).  We are less convinced of the dollar so we are going to step aside from the BEGBX fund below for now.  We haven’t actually acquired a position in that fund but have been watching it carefully.  

The stock market is in the midst of earnings season and these have not been very good so far and any time we have an important report it could give the market a problem.  We repeat that we see very little upside in the coming weeks.  Our estimate for the position of the stock market is unbelievably still near overbought even after Wednesday’s trading so…

Be careful out there.

Dow Industrials:  11,013.18  -121.59
RYVNX:   23.69  (new 52 week high)
RYAIX:  25.09  (new 52 week high)
TLT:  84.66
BEGBX:  13.37  (dollar strong again today)

Tuesday, July 11, 2006

The KLAC Attack

The stock market was down in the early going on Tuesday, some say due to the India bombings.  During the afternoon one of the tech companies, KLAC, KLA Tencor, had a conference call with some analysts and said some warm and fuzzy things about Orders (bookings).  Apparently this ignited a fire under the stock market and we saw some violent up moves during the early afternoon.  From the early afternoon lows, the Dow rallied for about 100 points during the afternoon while the NDX, NASDAQ 100, rallied for about 25 points or about 1.5%.  

The stock market is trying very hard not to let go and drop a Lot.  It didn’t go down on Tuesday but over the next few months we still expect a very harsh and unexpected drop.  We said to sell in May and go away and we are sticking to that until we see a good sized drop.  Since May the NDX has dropped about 200 points so far for more than 10% and we expect another 10% or more before it’s over.

The Dow has been the laggard to the downside but that is the way it usually is.  The Dow is made up of big cap companies and seems more stable to the unsuspecting public.  Most people look at the Dow and judge the direction of the market or their portfolios by how it is doing—without actually looking to see what those two things are actually doing.

Speaking of actually looking at what is really going on, we urge you to read the “True Contrarian” on the link at the left.  He has posted a nice update on the markets from here to the early autumn period and we are in lock step with his thinking.  Go down a few pages to the bold print dated July 11th.  The primary use for his postings is the gold calls but he does mention other markets too.  He is looking for a good opportunity to buy gold mining stocks in the late summer to early fall.  We will watch for good entry points.

The stock market seems to have dodged a bullet on Tuesday but we don’t think there will be much on the way of upside with this move.  The market is still basically overbought and complacent.  If a rally continues, sell it.  We will get much better prices to buy back into stocks come fall.  Until tomorrow’s post…

Be careful out there.

Dow Industrials:  11,134.77  +31.22
RYVNX:   22.75
RYAIX:  24.59
TLT:  84.64
BEGBX:  13.48

Monday, July 10, 2006

Techs Go Down Quietly

Last Friday it was MMM that warned and Monday it was EMC’s turn.  Just before the market opened, EMC lowered its outlook for second quarter results.  EMC is a tech company and led the NASDAQ down on Monday turning in nearly a 7% loss for itself by the end of the day.  The NASDAQ 100 traded up 11 points early Monday but two hours into the day it couldn’t stay green and by the end of the day ended down about 12 or just less than 1%.  The Merrill Lynch strategist Richard Bernstein downgraded the tech sector because of interest rates hikes by the Fed.  

Meanwhile back at the funny farm, the Dow opened up and kept going up for about an hour and a half to plus 80 on the day making up for some of the 134 gouging it took on Friday.  But, from there the Dow basically slide all day long and was trading in negative territory before rallying in the last hour to close up about 12 points.

In case you haven’t noticed, the stock market is having trouble holding its head above water and the “bear” is reasserting itself.  We saw the little “Fed is done” rally last week but that has quickly crumbled especially in the broader market and more particularly in tech.  Looking at the NDX, the NASDAQ 100, it is now trying to hold the 52 week lows and probably will fail very soon.  The low there is 1502.20 and it closed Monday at 1520.90 so about 1 percent above the year low.  

The semiconductor index we generally follow is the SOX.  Looking at the SOX this evening we see that it dropped over 2% today and broke through the October/November 2005 lows.  The semi’s are struggling to say the least and this is going on while the Dow is still above the 11K mark.  

After the market closed on Monday, AA, Alcoa, reported second quarter earnings.  The company failed to meet market expectations for sales and fell 4.5% in after hours trading.  Still the futures are showing a positive opening for the market on Tuesday.  We’ll see if that holds true or not.  Likewise, Lucent warned of lower revenue and profit.  I’d tell you that the stock traded lower in after hours trading but that would not surprise anyone.  This is a $2 stock and it is known for its “wild” trading, please.

We expect very little strength to develop in the market any time soon.  The market is Overbought right now and at any moment is ready to roll over Hard.  We hope you have unloaded your stocks and if not…

Be careful out there.

Dow Industrials:  11,103.55  +12.88
RYVNX:   23.11
RYAIX:  24.77
TLT:  84.37
BEGBX:  13.41

Sunday, July 09, 2006

MMM Overwhelms Jobs Report

Here we are in front of a new week of trading and having to look back at last Friday’s trading to get some idea of what is going to happen this week, the old look in the rear view mirror to see where you’re going.  This is normally not a very good idea in the real world so we need to be careful not to put too much credibility on where we’ve been but we do need to review the Friday trading day.

Our last post said we thought we would see a pretty good pop at the opening if the jobs report was at all weak and Weak is what we got.  The ADP estimate we told you about last week was about 368K and the composite estimate was 175K and the number actually came in at 121K an hour before the market opened.  Bonds liked the number all day long and stocks liked the number until…

Just before the opening, MMM, Minnesota Mining and Manufacturing warned that second quarter profit would miss earlier guidance.  The reason, weaker than expected demand for optical films used in flat screen TV’s and computer monitors.  The news immediately hit MMM, a Dow component, and the stock market reacted negatively.  The opening bell included a five point drop in MMM and the Dow was quickly down about 85 points.  The selling picked up about half way through the session with the Dow down about 160 before rallying to close down 134.  

This action reveals the tenuous nature of the market at the present time.  On Thursday we saw MO jumping on the tobacco news and then Friday we get the crushing blow of MMM.  We expect that the market is not prepared for any negative news coming out of second quarter earnings reports.  Of course, the media is extremely bullish on the upcoming reports but when a company of MMM’s stature gets hammered for almost 9% there could be more where that came from.

There isn’t much in the way of economic news in the next week but we will try to keep you posted on the earnings news that we find interesting.  

We do hope you took the opportunity to get out of some of your holding over the past week.  The 200 point Dow rally was a very good time to do so.  Looking back on our call for a rally starting right after the Fed news and going to 10 o’clock last Thursday was spot on—How do we do it?  The MO news spurred that little rally on Thursday morning allowing us to be happily bullish for a week.  For those of you who traded PAAS in that period of time, you would have bought it for right around 16.85 and sold it around 18.40 for a tidy 9% profit in a week.

Be careful out there.

Dow Industrials:  11,090.67  -134.63
RYVNX:   22.72
RYAIX:  24.56
TLT:  84.29
BEGBX:  13.49

Thursday, July 06, 2006

Mo Rules

Our title tonight refers to the Company Altria, symbol MO, which owns Philip Morris the cigarette company. In today’s news, the tobacco industry got a drag on some fresh air as the Florida Supreme Court upheld a ruling tossing out the $145 billion verdict. With this news, as you might imagine, tobacco stocks were smokin’. MO itself was up a nice 6%, trading to an all time high on the back of that news during the day.

We only bring this up because when we were asked back in early 2000 what to buy, we said MO. It was trading at 19 or so and had a 48 cent quarterly dividend for a cool 10%. This was during the time of the initial ruling. Six years later this stock pays an 80 cent quarterly dividend for $3.20 a year, about 17% on the original purchase price, and sells for 77.

I don’t want to debate the “social responsibility” of the stock because I know there are good reasons for people to shy away from this type of company. I am simply trying to point out the contrarian play that was available to you when the stock market was going down in the first few years of this century. MO was responsible for about half of the Dow’s gains on Thursday.

The Dow did do a little bouncing back on Thursday helped much by MO. Looking at the broader averages, there was a mixed bag. Our favorite index, the NASDAQ 100, was actually down on the day.

This sets us up for Friday’s jobs report. The market seems like it wants to go up on the early news. We would like this as it would set up a perfect reversal from any highs that might develop. Here’s the analysis: The stock market has anticipated a big number of jobs based on the ADP report that said that nonfarm payrolls grew 368K last month. The estimate currently floating around is 175K for Friday morning. So the news on ADP Wednesday pushed the market down, why?, because the Fed may have to keep raising interest rates. If the 175K estimate is high and the number comes in lower than that, the market might be inclined to make up for the hole it dug on Wednesday. Twisted logic.

Last week, the Update turned bullish for the time frame from the Fed’s announcement to Thursday at 10 o’clock (we meant to say Friday at 10 o’clock due to the jobs report, but we didn’t say that). Anyway, with the tobacco news on Thursday pushing up the Dow right at 10 o’clock, we saw a 200 point rally in those few days with the peak right at 10 o’clock. But, it is possible that Friday’s high could be higher than that. Either way, we have seen good opportunities for you to unload some of your stocks in these days.

We were advised of an article in the July 5th WSJ's Mutual Fund Quarterly Review entitled "Surviving a Real-Estate Slowdown". The WSJ interviewed Kenneth Heebner, the manager of a very successful real estate mutual fund, on his thoughts about the current real estate environment. His comments should be credible, although he does not completely line up with our thoughts. See if you can find a copy to read (page B1).

By the way, this contrarian would tell you to sell MO right now particularly if you had purchased it back in early 2000. Anyway, it’s my birthday on Friday so today’s post was just a lot of fun stuff to reflect the fact that I made it another year.

Be careful out there.

Dow Industrials: 11,225.30 +73.48
RYVNX: 22.19
RYAIX: 24.27
TLT: 83.75
BEGBX: 13.40

Wednesday, July 05, 2006

Fed Trumps North Korea

Here it is July 5th and we are back. The market continued its volatile ways while we were off and we expect more of the same for the near term. We can’t remember much about last Friday or Monday so let’s take a look at the trading on Tuesday.

Before the market opened there was more softness in the futures that had been down overnight. The media brought the North Korean missile tests out for traders to get the idea that was why the market was down. We don’t think that is the case but the media does have the authoritative final say in these matters, not the market…sarcasm still works.

Our last couple of posts were advising that a rally would be coming after the Fed raised rates and we got a pretty good run in the Dow. The move was fairly fast though as the actual peak in the Dow occurred near Friday’s open at 11,235 after trading down near 10,950 last week. That’s nearly 300 points in a few days. Monday’s shortened trading day was an up one with the Dow rallying about 78 points.

Trading for the rest of this week will be related to the jobs report due out on Friday morning, our normal pick for the high of the month. This week the market is paying close attention to the “strength” in the economy for signs as to what the Fed will do. To that end, the North Korean missile test does not really tell the market very much about what the Fed will do, but there was a report out on Wednesday forecasting Friday’s total nonfarm payroll will be growth of 368K. The current estimate is for a 170K increase. The market seemed to be spooked by this fresh estimate and, with the bond market reacting as it did (down), we tend to give this report some credibility. Since the broader market was down on Wednesday, we think that the market may have discounted some of this news already. Now, we just need to wait until Friday morning to find out.

Wednesday’s broader market dug some deep holes in the “Fed inspired" rally since the middle of last week. We are still looking to Friday morning for some good signals on the market. We did note that our momentum indicators have turned over bought in the last few trading days even with the light holiday trading. These are difficult days to trade.

On Wednesday, oil rallied to over $75 and this seems to rattle a few of the media folks. We have talked about the price of oil going up along with the stock market in the past several years. We don't see this as particularly interesting at the moment, oil goes up with the stock market. How do you trade that? Probably buy oil related stocks--which we don't really follow here.

We should have probably given you better advice about what to buy last week especially given our interest in the mining stocks. We saw that PAAS traded around 16.75 right before the Fed made its announcement and traded up to 18.60 early Monday morning for a very nice 10% plus trade. Oh well, maybe next time, in the mean time...

Be careful out there.

Dow Industrials: 11,151.82 -76.20
RYVNX: 22.12
RYAIX: 24.23
TLT: 83.24
BEGBX: 13.34