Thursday, September 28, 2006

Nirvana Was Brief

Looking at the closing price of the Dow, you can see that we missed a new all time high in the Dow by 4 points but we did trade above the magical number earlier in the day.  Now the questions are was that Nirvana and did you enjoy it?  Well, just because the Dow is near a new high doesn’t mean we are anywhere near that in the other major indexes.  There is similar speculation in the market as we had back in the early part of 2000 when the Dow created its all time high.  The general tone of the market is a soft sort of up move without much punch, almost like it is floating on air.  

The GDP final revision was somewhat down from the last revision and down from expectations.  This didn’t seem to bother the market all that much.  During the morning, the market started strong and then fell for a couple of hours.  Around noon the market seemed to stop going down and there was a continuous rally into the close such that we probably went out near the highs in the indexes.  

There is very little to say this evening as the market continues its course of churning ahead.  We strongly believe that the market is struggling to maintain these levels and once they break we will see a severe decline in the indexes.  We did think that this decline would start sooner than this and we are disappointed to be watching our portfolio shrink on what seems to be a daily basis.  But we are still up on the year and we are well positioned should the market rally run out of speed as we expect.  

The end of the quarter is upon us tomorrow and now we slide into October with the elections in about a month.  We are trying to be patient.  There will be more opportunities for us as we go forward.  I do not and have not felt good about any long positions in the last month during this rally; certainly nothing we follow looked bullish.  We will continue to monitor the situation and try to provide the best objective market analysis possible.  Have a good weekend and we will return next week for what we hope will be a roll over in the market.  

Dow Industrials:  11,718.45  +29.21
VIX: 11.72
QQQQ:  40.83
RYVNX:   19.54
RYAIX:  22.96
RYCWX:  39.41
TLT:  89.52
BEGBX:  13.73

Wednesday, September 27, 2006

2 Points Away

Wednesday’s news had durable goods down and new home sales up.  Both of these results seemed to confuse the players who were comfortable with an expected little increase in durable goods and also assuming new home sales would be flat or down.  The market was trying to figure out just what the Fed was thinking. To help the traders decide what to do, MSFT raised its dividend and produced some upside in the indexes.

All in all, the stock market is now struggling for gains and it is Wednesday.  We do think the market is almost tapped out with good news.  Higher volume numbers indicate to us that the market has Found some sellers at these prices.  This results in lots of volume, actually not that much, and not so much price movement.  

The confidence shown in the market during the past few weeks is almost beyond belief and still there are very many bulls out there.  As our last post indicated, there are many who seek the ultimate Nirvana, that being the Dow at new highs.  Well, Wednesday’s trading brought the Dow within 2 points of that all time closing high but before the close it had slipped back some.  The Dow is so close to that old high that it would almost be a shame not to touch it.  That way, all the bulls could relax and say that they were enjoying Nirvana.  Ah complacency is nice and relaxing, isn’t it?!?

The big mover was oil with a big round trip from the $61 opening price to the early morning low around $60 back up to close around $63.  It was a tough day.  This didn’t really seem to bother the stock market all that much but the stock market is near Nirvana anyway so it’s not bothered by anything.

Tonight, we are seeing more underlying deterioration in the technicals and we feel the need for the market to go down, at least a little.  We did think that Wednesday would probably put in the high for the rally—we will only know that is true in the future.  The main issue is now seeing if we can get the thing to roll over and go down.  The bullish momentum seems pretty contagious but we have been vaccinated from this virus.

The next two trading days will tell us much about the state of the market.  We won’t be surprised at anything that happens but we know the market is weak under all that bullishness.  When the fa├žade comes off, there will be some exposure to the downside.  We look forward to the next down move which could have started Wednesday.  

Dow Industrials:  11,689.24  +19.85
VIX: 11.58  (pay attention to this number)
QQQQ:  40.72
RYVNX:   19.67  (own)
RYAIX:  23.04
RYCWX:  39.58  (own)
TLT:  89.63  (own)
BEGBX:  13.75

Tuesday, September 26, 2006

Nirvana in Sight

With Tuesday’s rally in stocks, the all three major indexes we follow did manage to move above last week’s highs. The SP 500 now has made 5 ½ year highs for two days in a row. The Dow is again within striking distance of the magic all time closing high price of 11,722.98 with today’s close of 11,669. The most logical thing is for nirvana to occur and the Dow make an all time new high. That would please all of the bulls and would provide us with another nonconfirmation.

We were disappointed in the market’s ability to rally in the face of the news that is out there; but, the market is only thinking that we are about to go into a magical period for the economy due to the fact that the economy is now noticeably slowing so the Fed Can’t raise rates for sure. As you probably know, we do not share the market’s jubilance. We are concerned with the business of over-valuation and with the next Big move being down. We do sound like a broken record but at this point, there is no reason for us to change our tune.

One big item for this position is the VIX. As we mentioned in our last post and you can see at the bottom of this post, we have added the VIX to our list of daily reports. This is the volatility index and we see that it fell hard again today. This is a measure of how much fear of a market decline there is, the lower the number the less the fear. (This is measured by the amount of premium in the index puts in case you were wondering.) Tuesday the index closed below 12 and near the lows for the last couple of years down around the low 10’s. Just for the record, We will Not be bullish stocks (other than mining stocks) until this index goes up to a much higher level—we will let you know but it won’t be anything less than 25.

Today, we heard that the consumer confidence numbers were much improved over last month but didn’t quite make up all of the ground lost last month. We think there are reasons for this with the main one being the recent drop in gas prices. The Conference Board’s actual report added that the outlook for jobs improved as well as current economic conditions. Consumers’ outlook for the economy’s performance over the next six months improved.

We tend to think that any positive news stories over the next few weeks have a great deal to do with the political landscape looking toward the elections in November. This includes the stock market headlines, especially the 5 ½ year high in the SP 500 and the Potential All Time high in the Dow. All of these things tend to make consumer confidence go up. The big question is if the market can hold up until the elections. You know our answer to that.

We believe, as we said earlier this week, that the market will peak on Wednesday due to the end of the quarter window dressing. The mutual fund companies need to have the right stocks in their annual reports, you know, the ones that went up this quarter or year. That effect is probably going to hit its peak on Wednesday. To help this along, the news on Wednesday includes the durable goods and one of our favorite indicators the August new home sales.

In the "huh?" column, we saw an article on CNN Money at the end of the day that said that the stock market can now enjoy some fresh money from those people who would otherwise plow their free capital into real estate. Since real estate investments are currently "dead" money, the analyst felt that at least a portion of newly available money would find its way into the stock market. So, the real estate market bailed out the stock market after the big decline and now the stock market will bail out the real estate market. That's a neat trick...

Dow Industrials: 11,669.39 +93.58
VIX: 11.53
QQQQ: 40.77
RYVNX: 19.59
RYAIX: 22.98
RYCWX: 39.70
TLT: 89.93
BEGBX: 13.76

Monday, September 25, 2006

SP 500 At a 5 1/2 Year High

The headline we noticed this evening was the one you see above. We have been talking about this 1325 level in the SP 500 for a while now. With the SP 500 moving to a closing high on Monday shows the market was still willing to push a little higher. In our last post we talked about the Dow putting in a new high and with it a nice little cherry on top of this rally.

Well, maybe the SP 500 has done that instead. With a new high in the SP 500, there were nonconfirmations all around in the other indexes. The Dow, NDX, NASDAQ Comp and the RUT are all lower than last week’s closing highs; but more importantly, the intraday highs, those set during the trading day, were only broken by the SP 500, all of the other price indexes failed to make new highs against last week’s.

During the day, the Dow was up over 110 points but could only hold 67 by the close. The SP 500 lost three points from its trading high. There was some weakness going into the close, not much after such a powerful price move earlier but weakness.

Our other indicators are not confirming this move either, at least a majority do not. This market is showing price strength and big headlines but is failing to confirm any strength in the technicals. We hastily admit that the price move we have seen here in the last two weeks has been out of the blue and has hurt our portfolio. We, here at the Update, have to follow the indicators and not trade on emotion. We look at longer term trends and do not see this being able to sustain itself.

Going to the news of the day, we saw the housing numbers being a bullish item due to the perception that the market has. The news was that the price of homes fell year over year for the First time in over Ten years, but sales weren’t quite as bad as expected. Two things came to mind, one, the obvious weak economy, Fed is done rally, and, two, that since the housing numbers weren’t as bad as the market expected, the housing numbers are bottoming out and ready to rock again.

Please check out the WSJ article on page A2 entitled “Existing Homes’ Median Price Falls”. The article falls in line with most of the other housing news we have seen for quite some time. (Try to ignore Mr. David Lereah’s comments, if you can.) There is a chart that shows the year over year price change in homes with the heading of “Sinking Feeling” that is very telling.

The other news, running into some difficulty to be explained, was the price of oil. In the early going oil was down under $60, a strong 1.5% move down, first time below $60 in about six months. Then as stocks were bottoming in the first hour of trading, the oil prices started moving up as well such that by the end of the day oil was up 1.5% for a nice 3% move from the morning’s lows.

The bonds had another nice day. It’s a nice thing when oil and bonds can go up on the same day, nice but illogical. So we had another trifecta, with bonds, stocks and oil all up on the day.

We are adding the volatility index, VIX, to our numbers this evening. We expect an important increase in this index over the coming months.

Dow Industrials: 11,575.81 +67.71
VIX: 12.12
QQQQ: 40.57
RYVNX: 19.79
RYAIX: 23.10
RYCWX: 40.33
TLT: 90.31
BEGBX: 13.83

Sunday, September 24, 2006

Stocks Are Ready To Go Down

Last week Thursday and Friday, we got to see a little of what we thought September would bring to us, a little selling but it was selling.  The week contained a potential relative high especially considering the SP 500 mark of around 1325 holding the advance.  The upcoming week will bring us more information on that score.  This happens to be the last week of September but it is also the last week of the quarter so there may be some position squaring, as they call it, in front of the weekend.  This is usually done by the middle of the week but this has been an unusual quarter so the last week will probably give us something to fret about, too.

Looking at last week, we see that the SP 500 closed just under the 1315 level so about 10 points below that glass ceiling we have talked about.  Our favorite index, the NDX (NASDAQ 100), managed to struggle up to the 1655 level before closing the week at 1622.  

As for the Dow, we see that its closing high for the recent move of 11,613 is within 110 points of its all time closing high back on January 14, 2000 of 11,722.  We are certainly surprised by the possible miss if the Dow can’t make this level.  We wouldn’t feel bad if it didn’t make it but just the idea that it wouldn’t after being so close is almost not right.  In fact, we wouldn’t be surprised if the Dow did make a small new high which would pretty much put the cherry on top of this rally attempt.  

For now, though, we have to figure that last week’s highs in all the indexes are the last highs of this rally.  Now we should find our way to the down direction and stay that way for a while.  This rally has extended much further in terms of time and price than we thought possible but since it has stretched this far it has given many traders/investors a sense of well being.  We expect the stock rally to have a difficult time giving itself up to the bears but we do think it will.

This complacency is measured in terms of the volatility indexes.  The one we have been mentioning here is the VIX which finally got some life back during the pull back of Thursday and Friday.  After trading almost down to 10.50 on Wednesday September 13th, this index has now found its way up to 12.59.  On June 13th, this index traded as high as 23.81.  We think this index has the potential to get to triple digits in this next decline but the first stop would be in the low 20’s.

Monday brings us the August existing home sales so we are on the lookout for that number.  This is a bit of a lagging indicator because these sales are not reported until closing so we will probably see weakness in them.  The reason is that interest rates peaked in July, just when these sales were made.  We’ll see what the market thinks of them and whether they are bearish or not.

Last week, the bond market enjoyed some poor data points, especially the Philly Fed report we mentioned.  The Treasury bonds have been in a nice uptrend since the beginning of July.  This time frame is right around the same time the mortgage rates peaked.  The bonds seemed to break out to the upside (prices not rates, rates are going down).  You can see this if you look at three month chart of the TLT (we have owned this for a while, getting paid pretty well to hold the position due to the dividends).

Dow Industrials:  11,508.10  -25.13
QQQQ:  39.87
RYVNX:   20.48
RYAIX:  23.50
RYCWX:  40.80
TLT:  89.61
BEGBX:  13.82

Thursday, September 21, 2006

Bearish Data

The futures contracts were up strongly before the open but the early rally only lasted about five minutes before selling came in and wiped out those gains. Then the market staged another rally that also failed due to some pesky little news items. The first was the often ignored LEI, leading economic indicators, which were down for the second time in two months and the fourth time in five months. That index seems to be pointing in the Southerly direction, after all, it is a Leading indicator report.

Then the Philly Fed report (was that Silly or Philly?) said that its business conditions index, a gauge of the regions manufacturing sector, fell to -0.4 in September. This is the first time since April 2003 that this indicator has been negative. The August number was 18.5 and economists predicted the index to drop to about 15. This knocked the socks off the rally attempt and the market (Dow) dropped about 85 points over the next hour.

Another bearish event was the continuing HPQ (Hewlett Packard) story that has now engulfed another player, CEO Mark Hurd. Apparently, he has been identified as one of the possible players in the scandal involving the Board. The SEC has requested some information and Mr. Hurd is probably going to testify before a House committee on the subject. Our interest is that this news hit the stock again today, this time to the tune of about 5%. HPQ is a Dow component so it affected the Dow on Thursday.

Looking at the market, we were particularly interested in the glass ceiling that we have been talking about for the past few posts. The main one we have focused on is the SP 500 level of 1325. Today the index did manage to push up to 1328 area but could not hold it and finished down on the day at 1318. We find this significant because there are many who were/are looking for a good breakout in this index this week. So far, the market has not managed to break resistance at that 1325 range.

Friday should give us more information as to the near term direction of the market. We didn’t think Thursday’s market was strongly down but our portfolio finally had a fairly good day. One day does not a trend make but that 1325 barrier has held again lending credibility to our notion that we are done going up for now. Since we are very late in September, we are somewhat concerned about the actual timing of a market decline. We will probably have to revise our dates for a market low but we don’t really think dates are all that important. What is now important is that we get a decline started.

Have a great weekend and we’ll see you back here next week.

Dow Industrials: 11,533.23 -79.96
QQQQ: 40.18
RYVNX: 20.16
RYAIX: 23.30
RYCWX: 40.58
TLT: 89.24
BEGBX: 13.78

Wednesday, September 20, 2006

The Fed Stands

Wednesday the market opened strongly on the back of ORCL as well as a few other good earnings reports, a big one from Morgan Stanley. After the initial blast, the market traded in a fairly narrow range, waiting for the Fed’s announcement in the afternoon. The news was just what the market was expecting, no change in the Fed funds rate. There was some chatter about how the Fed was potentially going to raise rates so a quick market drop of about 30 points occurred right after the news. After that, the market managed to crawl back to highs of the day on the close.

In our last post we mentioned that the 1325 level in the SP 500 was a critical spot and while the SP 500 moved a little higher than that during the day, it closed right at that level. Sometimes this technical stuff actually works. The May high close in the SP 500 was 1325.76 and Wednesday’s close was 1325.18, a full 58 cents less. The same thing is going on in the Dow, with that index putting in a closing high in May of 11,642.65 compared to Wednesday’s 11,613.19. (By the way, the NASDAQ Comp had a closing high in late April of 2370.88. Wednesday’s close of 2252.89 is a far cry from that level.) These differences are hardly worth talking about but the proximity is worth talking about. The bullishness out there right now is not getting much in terms of price action.

One of the indicators we watch is volume and volume is not confirming this move up either. The average daily volume at the NYSE in April and May was just about 1.7 billion shares. The average daily volume in the last two months has been about 1.5 billion shares. The volume on Wednesday was 1.6 billion shares, so only about 100 million shares more than the last two month’s average.

Some of our other momentum indicators are not showing any comparable strength to the May highs. The volatility index is again pushing down below the May lows (this is an indicator that goes opposite the price of the major stock indexes).

We remain bearish and are wondering if the May highs will hold this advance. By all counts, it seems they should.

Another reason cited for the advance on Wednesday was the drop in oil prices. We see this as a dangerous, slippery slope. All the time the market has been rallying the price of oil has gone up. Now that the price is dropping, we need to ask the question “Is this bullish?” Maybe on the very short term, we could see how the market participants could interpret it as bullish hence a day like Wednesday.

Dow Industrials: 11,613.19 +72.28
QQQQ: 40.43
RYVNX: 19.89
RYAIX: 23.15
RYCWX: 40.03
TLT: 88.43
BEGBX: 13.65

Tuesday, September 19, 2006

YHOO POOHS

We’re not exactly sure where to start this evening due to the number of items we would like to mention. The early morning had stock futures down a little going into the two reports we mentioned, housing starts and the PPI for August. Both of these were “Fed Friendly” numbers and the market opened much better than the early futures had indicated. With the housing starts down 6% and PPI a bit less than consensus, at least the “Core” inflation number anyway, the bond market was strong all day with the highest close since March.

The stock market had not opened very strong and did drop for about the first hour of trading. At that time the buyers came in to bring it back to the highs of the day, at least in the NASDAQ indexes. That’s when YHOO dropped its news that the quarter wasn’t going to be as good as they thought it would be. YHOO dropped from 29 to 26, about 10%, in the space of about three minutes and brought the market down with it.

The NASDAQ indexes fell about 1.25% in about the same time it took YHOO to drop those three points. After that the market traded to stabilize and actually moved up in the last hour to close down but not nearly as much as we had seen during the mid-day trading.

With the market closing on a firm note, the after hours market was greeted with good news from ORCL. During the morning ORCL traded up to about 16.60 but then fell with the YHOO news pretty much closing the regular trading day on the low of the day. After their announcement the party began such that ORCL managed to trade up over 13%, providing a lift to the broader stock market in the after hours market.

As all of this was going on, the precious metals market was not so happy about the lower inflation expectations and the drop in housing starts. For its part, the gold mining index we have been following here, HUI, lost about 4%. The HUI closed at 293.98 after being near 370 just ten trading days ago. Looking at PAAS over the same period we see it traded at 23.70 ten days ago and closed at 18.41 on Tuesday, down over 22% in just ten days. Gold itself has fallen from $635 to $570 in that same period. All in all, quite a rout in the precious metals complex for two weeks! Yes, we are still waiting but the time is growing closer.

We were hoping to discuss the inflation picture this evening but the market decided to be interesting. There is a Fed meeting and announcement due out on Wednesday that we thought we would need to mention. We think the “Fed is done” rallies are starting to get less powerful and more sold, as Tuesday’s market revealed. As far as what will happen on the Fed’s announcement, we can say that we think the news will be for continued vigilance on the part of the Fed. This will lead to a modest rally that will get sold soon after it starts. The ORCL news will bring some general buying in the early going which will probably offer the best opportunity to get the highest prices.

The key to the market will be the extent of the ensuing rally. We still maintain that the market will be contained by the May highs—pay particular attention to the SP 500 and its assault on the 1325 level. Anything less that 1325 means the Fed’s rally is weak and will be sold. Above that, we don’t think it can go above 1325, but if it does, then it will be a matter of sustainability. It is possible that the market could hold it if it can be achieved but we don’t think it can. All we be known in good time—soon after the announcement. We would recommend Selling any morning rally based on the ORCL Hype. The later possible rally after the Fed’s announcement will probably not go as high and will be trickier to sell into. We are so looking forward to this news being behind us.

Tuesday was kind to our portfolio, finally.

Dow Industrials: 11,540.91 -14.09
QQQQ: 39.85
RYVNX: 20.50
RYAIX: 23.50
RYCWX: 40.52
TLT: 88.30
BEGBX: 13.63

Monday, September 18, 2006

Amaranth Has Gas

Well, what do you know; we didn’t lose money on Monday. The stock market tried to open down on Monday morning but five minutes into the session we saw green, again. The rally has tried to stay alive long enough to test the May highs in the SP 500 and the Dow too. Friday’s high in the Dow was just over 11,610 getting very close to May’s closing high of 11,642, while the SP 500 traded right up to 1325 on Friday and Monday a whisper away from its May closing high of 1325.76. When we said these May highs would last a long time we meant more than a couple of weeks but here we are back up here testing them.

Last post, when we mentioned some of the news items for the market to deal with this week, we failed to mention the Fed’s FOMC meeting on Wednesday. That could be a pivotal point for the trading week as the Fed firmly states that it is not raising rates right now—and, of course, they are being very vigilant on inflation. Meanwhile…on the inflation front, let’s check on…

Amaranth Advisors had a bad week trading natural gas, they might need some antacids. The WSJ should have the article on page one, Tuesday’s edition under the title How Giant Bets on Natural Gas Sank Brash Hedge-Fund Trader which is under a little heading of “Blue Flameout”. The article says that the fund was up about $2 billion for the year at the end of August but lost about $5 billion in September in about a week. (That’s more than we lost last week, but not by much.) The article comes with a little natural gas chart showing the drop in prices in the past month or so. We recommend this article for those of you who like the energy complex which has not fared very well for little while.

Tonight, we see that the Japan stock market is having a pretty good go of it up over a percent last we checked. It seems that a report indicated that land prices finally showed an increase in the average land prices in Japan’s top three cities Rose for the First time in 16 years. 16 years!!! You may recall that the Japan stock market peaked in 1989 with the Nikkei Dow near the 40,000 level. After dropping from there to 7,600 in early 2003, it has now rallied back to the 16,000 level, still quite a ways from its 1989 peak.

Tuesday brings us the August housing starts and the August PPI, a couple of numbers we like to see every month: the first, because we need to know just what is going on in the housing market especially as rates were topping and coming back down, and the second because we are waiting patiently for the little inflation monster to disappear. We have been talking about inflation/deflation for a couple of years now and at some point, we will need to polish off the deflation talk and bring it back. We think the housing and the inflation numbers are tied very tight together so these numbers are important to our continuing view of the stock market. (One reason given for the drop in the market on Monday afternoon was the drop in homebuilder sentiment to the lowest level since...you guessed it, 1991, the eight month in a row to drop. Inventories of new homes have gone up 40% over the past year to a 7.3 month supply given today's sales pace. Before that report, homebuilders were faring well in the early morning advance. After, they ended down on the day.)

So, what’s going on? The stock market is running into a price ceiling and will now see if it’s at all possible to break through. We wish it wouldn’t because we think it shouldn’t due to what the market has already told us. This rally is a couple of months old now and it is time to be done. The Fed meeting gives the market a chance to look around to see if the belief in a soft landing is still viable or if others are now starting to think the Fed has already gone too far in raising rates. We will discuss this more in tomorrow’s post, you won’t want to miss that.

Dow Industrials: 11,555.00 -5.77
QQQQ: 40.11
RYVNX: 20.22
RYAIX: 23.33
RYCWX: 40.40
TLT: 87.40
BEGBX: 13.62

Sunday, September 17, 2006

New Week Ahead

Last Friday saw a lot of volume due to the options expiration and there was a bit more upside. The opening brought about higher prices after the CPI showed inflation was just right. With the market trying one more “Fed is Done” rally, we keep thinking the “Obvious” trade isn’t going to work Every time, is it? The Obvious trade being the one that the market goes up if there is maybe a hint that the Fed won’t raise rates. The market just isn’t that easy.

As it happens the major indexes did have a good pop at the start but failed to hold those levels as the day wore on. They were all up but not as high as they were off the bell. Normally, we like to see a good pop followed by a complete reversal where all of the indexes close down on the day. With options expiring, that just wasn’t to be on Friday so the market leaves us with a little mystery as to the signal it gave. This is customary for the market, in case you were wondering.

We think a lot of price action on Friday was due to the options expiration so we are not going to try to figure out if we had an exhaustion top on Friday morning or not. That information will come soon enough, as we are very near the top of the range for the market in our opinion. If the market wants to go higher, we will be disappointed again because we try to listen to the message that the market is telling us. When it forms a top and falls away from it, we think that it can approach that old high, thus allowing those who didn’t sell to sell. Well, here we are at the May highs in the Dow and the SP 500 so what will happen?

We can just tell you that the market’s technical indicators are weak going into this high. The market can still do what ever it will do but as we see it, the technical basis for any further advance just isn’t there. What that tells us is the market is just trying to fool as many people as possible, again something customary for the market.

As weak as the technicals are, we must follow the instructions the market is giving and that means staying short or selling, as is your case. In fact we think the market is on borrowed time and we are going to shortly see a drop that will bring sharp focus how vulnerable the market really is.

Over the next few weeks there are several data points coming out that we like to follow, some are potential market movers. To us they are more like road marks so that we know where we are going. Some of these data points have to do with housing and probably will show some improvement this month just because interest rates eased a bit in August. Even if that is true, the housing market is still in down mode and we do not think a little interest rate reduction will fix it. And, as housing goes, so follows the stock market…

Dow Industrials: 11,560.77 +33.38
QQQQ: 40.11
RYVNX: 20.20
RYAIX: 23.32
RYCWX: 40.35
TLT: 87.46
BEGBX: 13.62

Thursday, September 14, 2006

Precious Metals Complex Down

The stock market traded fairly dull again on Thursday and we really have very little say about it except that it looks very tired.  The volume dropped down a little from the previous few days and declines were decidedly more than advancers on the NYSE.  The market is like a little kid trying to stay awake but those eyes keep closing, the stock market is trying to stay up but the battle will be lost.

One area that jumped out at us as we were reviewing the market was the precious metals complex.  Gold and silver were down fairly hard and took the HUI down with them.  The HUI was down 13.50 to just under 300 at 298.76.  This brings us closer to our entry point but it is still pretty far away.  We were looking at the 250 range so there is still some 20% downside to go.  PAAS, our favorite little silver company was down strongly under 20 on the close at 19.31.  A 20% drop from here would put us just under 16 which seems to be a good number to look at for a starting point.  We will of course be watching very carefully once this stock goes to that area and the HUI gets back to 250.  All in good time.

Tomorrow, we see the latest inflation numbers in the CPI.  The market would like to see confirmation that the Fed will indeed stop raising rates for good.  They should read our posts because then they would know that the Fed is done with increases.  The question is “How long until we get a reduction?”

The week was not kind to our portfolio but we don’t think we have much longer to wait for a decline.  The last two days have been setting the top in place.  But, it looks like we probably will need to wait until next week.  See you back here then.

Dow Industrials:  11,527.39  -15.93
QQQQ:  39.99
RYVNX:   20.34
RYAIX:  23.40
RYCWX:  40.54
TLT:  87.53
BEGBX:  13.66

Wednesday, September 13, 2006

One More Up Day

The headlines read that Wall Street hit four month highs and is now at the highest point since May.  That’s good but not great.  We have said that the May highs should hold for a long time.  The way the Dow and the SP 500 are trading that statement may be in jeopardy, but the way the players are feeling is much more like a top than a bottom—confidence to spare.  We continue to see weaker readings in our technical indicators even with this up move the past few days.  

There is very little to say about the action on Wednesday.  Mostly the indexes opened a tad lower and then basically were grinding higher all day long but without much enthusiasm.  This “bull” market is tired and has very little power in it.  The Dow has rallied 200 points in three sessions from low to high.  If this truly was a bull move, the Dow would be up 4% in one day and then the next day would be up 4% more.  

Whatever the market makes you Feel is not what you should be thinking.  We are as tired of this two month rally as we can possibly be but it is near its end and not the beginning of a fresh up move.  We have lost quite a bit of money in the past few days but we still believe the next big move is going to be down.  

The market has been struggling to keep the rally going even though the real bear has not been wakened from its nap.  We have said that the market would drop into the October time frame.  Since we are now in the middle of September, it would seem that we are going to have to revise our low point to be later in the year or early next year.  We can’t know about the low until we actually see some selling.

The precious metals complex will probably bottom here in the next month or two so we will be watching that carefully.  As far as stocks go, we can’t believe this rally has much staying power.  Every day that goes by without a turn down, is another day for you to take care of your portfolio.    

Dow Industrials:  11,543.32  +45.23
QQQQ:  39.96
RYVNX:   20.38
RYAIX:  23.42
RYCWX:  40.42
TLT:  87.73
BEGBX:  13.63

Tuesday, September 12, 2006

Bull's Party Continues

Tuesday is the kind of day that we would like to ignore. Since we can’t, let’s try to look at the highlights of the day, and there were a few of those. Two items stood out in my mind as the catalysts for Tuesday’s rally, the BBY report and the price drop in crude oil, one a legitimate reason for rallying, the other not as much. BBY (Best Buy) said things were pretty good in the flat panel TV department. They beat their number and said the rest of the year would be driven by those higher margin TV sales. With some of the news out of the retailers being fairly negative with back to school sales, this news from BBY was greeted with some pretty good buying across the market. BBY itself was up nearly 10% on the day, not a bad day.

As for crude oil, it dropped nearly $2 and closed under $64. This is the number that we wonder about. Does the fact that the market has gone up with the price of oil mean that the market should go up when the price of oil goes down? The logic could be that the overall level of inflation will be well contained with lower oil so the Fed will be able to hold or even lower rates. If that’s the market’s logic, then we get to the same place because we think the Fed is done raising rates for this cycle. Part of that is driven by lower commodity prices in the short run but the hint of deflation is now in the air as well. We will save the deflation story for another time…

The World Record Trade Deficit was a non-event, as the market decided it was time to actually buy the dollar. We said in our last post that the trade deficit would probably be fairly high due to the price of oil and the fact that July is a 31 day month. The deficit was well above estimates but no one was around to actually care. Yes, this number is a bit old since it’s from July but it does have some meaning especially when taken against the negative savings rate in the country. We have said it before and we say it again, the biggest export the US has is dollars. For now it seems the world is content to keep sending them back to us in the form of buying our debt.

Our portfolio got smacked hard today as the major indexes rallied strongly on pretty firm volume. The volatility index we follow (VIX) spiked down during the day to show the utter complacency in the market--no one can imagine the market going down. The major market indexes are below the highs of May but the VIX is again back down to the early May levels—NO FEAR.

We do remind you that even in the face of this great rally on Tuesday, the market remains Under the May highs and Over bought. The technical indicators are not in positions that suggest further strength. Yes, volume did pick up the last two days but not as much as you would like to see.

One thing we see is that the market dropped with a gap last week and today the indexes are trying to close those gaps. The three major indexes did close those gaps with the SP 500 being the weakest in its effort. So, as we look at the market over the past two weeks we see a large drop last week and a large rally this week, net net, there has been little change. Still, the players are bullish. The bulls seem to be confident that nothing can go wrong—we beg to differ. Stay tuned for more.

In the precious metals complex, gold tried to rally over night Monday but trading on Tuesday reversed that early strength. The complex seems very weak and we recommend caution here.

Dow Industrials: 11,498.09 +101.25
QQQQ: 39.68
RYVNX: 20.59
RYAIX: 23.54
RYCWX: 40.79
TLT: 87.69
BEGBX: 13.59

Monday, September 11, 2006

Precious Metal Sector Drops

As we noted in our last post, gold and silver took a big hit in Monday’s trading both overnight and during the day.  Gold got hit for over $20 and silver for over a dollar taking it down about 9% on the trading day.   (This evening there has been somewhat of a recovery in those precious metals with gold and silver both up.)  As for the mining stocks, the HUI fell 25.62 or about 7.5% with the 25 being in line with the $21 price drop in gold itself.  The True Contrarian, link to the left, has a new post from this past weekend, indicating his pick for the low point on the HUI to be right around 248.  The HUI closed at 312 today after a 25 point drop and was almost 370 last week.  With 20% left on the downside, we necessarily wait.  We recommend you do, too.

The market got off to a rocky start with DELL’s announcement of an SEC investigation of possible misstatements in prior financial reports.  In conjunction with the announcement, DELL said it would suspend its current share repurchase program until some of these pesky financial matters were resolved.  DELL’s announcement took about 1% out of the NASDAQ 100 in the early going.  

As bears we don’t like to see Monday’s start off with a down opening on obvious news related selling.  And, so it was, that shortly into the session the selling was declared over and a spirited rally took place on the back of a possible LBO of one of the chip companies, FSL, Freescale Semiconductor.  When this news hit, there was much scrambling to get some of the other chips and tech in general due to the possibility of similar buyouts in those companies.  We don’t particularly buy into the notion that there will now be a furious run to do LBO’s on other chip companies but of course we don’t know that for sure.  This buyout came out of left field so others could too.  

As we did our numbers this evening we noticed that even the volume was strong on the NYSE with over 1.6 billion shares traded, the most since August 9th over a month ago.  Maybe the summer doldrums are over for now with trading volume picking up this week.  The NASDAQ volume wasn’t quite that strong so we can’t make this statement for sure.

Tomorrow we get to hear about the July trade deficit and with oil prices as high as they were in July (and with July being a 31 day month as is August) we expect a fairly high reading.  This number doesn’t seem to mean much in today’s analysis of the economic landscape, but for us, it represents just another reason that the media could look to as a reason for the market’s coming decline.  There are a couple of other interesting data points coming out this week such as the refinancing index on Wednesday and the CPI on Friday.  Stay tuned for further information.

Don’t forget that those early May highs are our guideposts.  These little rallies that we have seen are just attempts at getting back to those highs.  Unless they do, these rallies are basically meaningless.  Yes, they have hurt our portfolio in the short run but we still are confident in the next major move being down and that it has already started—last week Tuesday being the high point.  

Dow Industrials:  11,396.84  +4.73
QQQQ:  38.96
RYVNX:   21.44
RYAIX:  24.01
RYCWX:  41.51
TLT:  87.25
BEGBX:  13.62

Sunday, September 10, 2006

Fifth Anniversary of 9-11

As we are writing this Sunday evening, we notice one of the big moves in the overnight markets is the precious metals.  Gold is down about $13, breaking below $600, and silver is down about 10% to $11.  These are huge moves and should get some attention in the morning.  We have been avoiding the precious metals complex as we have been waiting for a good correction in order to participate in a better value play.  Patience is difficult due to the big rally these stocks had along with the corrective rally in the metals themselves.  We wait.

Monday is the fifth anniversary of 9-11 and we only mention this because it was a large market event five years ago.  The day itself holds a lot of continued emotional meaning for many people but the anniversary should not affect trading this week.  We do think the market is on borrowed time at this point but the catalyst for a decline will not be the anniversary of 9-11.  

In our opinion, there are many other good reasons for the market to go down.  For those of you who have been regular readers, you know that our main focus has been the cooling housing market.  The natural course of events would have the home prices drop causing the housing ATM to vanish from existence.  The housing ATM has allowed people to spend more than they earn and has been responsible for the “healthy” economy.  

The edges are starting to show some signs that the consumer is getting exhausted, mostly exhaustion of funds.  There comes a time when the credit buildup of the past must actually be paid back.  As long as the housing ATM allowed people to pay off their credit cards with their home equity, as well as home prices continuing to rise with interest rates staying or going down, the credit buildup could continue.  This scenario is about to be reversed.  The “deflating” real estate bubble will test the durability of the Fed.  

We expect that recognition of this thinking will prove to be the catalyst the market needs to drop and drop hard.  The safest place to be in times like these is cash or Treasury securities.  We of course are short but that is not for the faint of heart.  Any questions? Please leave us your question in the comments section.  Let’s make some money.

Dow Industrials:  11,392.11  +60.67
QQQQ:  38.72
RYVNX:   21.68
RYAIX:  24.15
RYCWX:  41.53
TLT:  87.33
BEGBX:  13.61

Thursday, September 07, 2006

Homes for Sale, Any Buyers?

After doing some reading this evening, we discovered that the market started out a bit under the weather due to some news on the housing front (this was not immediately available from the major news sources we follow during the day, the media choosing to focus instead on the lower prices for gas and oil). Two leading home builders, KB Homes and Beazer Homes, announced poor results and made comments about the future outlook, that not being too good. Both of these builders mainly markets to lower end home buyers.

From Beazer’s statement, “…net sales through the two months ended August 31 were 49% below prior year levels and cancellations of existing contracts rose to 50% from 26% in the same period in the previous year. As compared to prior years, a higher percentage of home closings are being deferred or cancelled, immediately prior to closing in many cases, due to worsening buyer sentiment and the inability of buyers to sell their existing homes. This revised outlook also contemplates potential charges to exit non-strategic land positions currently under review… The company is reviewing its operating plan for fiscal 2007 in light of the ongoing deterioration in business conditions and is currently aligning its overhead structure and capital spending with this level of closings to maximize profitability and optimize capital efficiency during this period…”

We quote this homebuilder because they said it better than we could. As we have said for the past year, the housing market is in a difficult period and this will take a toll on the stock market. These two companies, KBH and BZH are both down 50% from the highs of this past year. The facts speak for themselves in the previous paragraph.

To the action in the stock market, the traders tried to buy the market after the early morning hit and they managed to push the NASDAQ indexes, as well as the SP 500, into positive territory. The Dow didn’t quite make it. When the early afternoon highs were in, the market sold off until the end of the day and managed to close not far off the worst levels of the day.

Two down days has not generated much in the way of fear although the volatility indexes are up a little indicating there is some recognition of a downturn. We continue to suggest caution in dealing with this market. There is too much complacency and bullish optimism. The bulls will not be rewarded going through this month and maybe beyond.

This is the last post of the week and we will see you next week. The market is about to go our way in a Big way so we recommend you ask us any questions you want in the comments section. We will answer them as quickly as we can but at least by the next day’s post. There are many possibilities to consider and we would like to comment on the topics you are interested in.

As for our positions, we have eliminated all long exposure to the stock market. We are still long Treasury bonds (TLT) and we are short the Dow and NDX indexes (by owing RYCWX and RYVNX). We think that the next big move will be down and we are well positioned if it occurs.

Aggressive traders have the ability to trade put options and this would be an ideal time to ask us about these types of trades. In order to hedge your raw stock positions, if you absolutely can not sell them, is to buy protective puts. This is especially true in some of the riskier tech stocks like INTC. We still hold out our long term low price for INTC of 12 (on the way lower, maybe into the single digits).

NVDA (Nvidia) has just experienced a big retracement of the drop from its May highs. May’s high was almost 32 with July lows down in the 17 range. Last week’s high was 29.50 and today it closed at 27.61. We could easily envision, or is that Nvision, the price going back down to at least 17 if not lower. These are opportunities worth taking a look at.

Dow Industrials: 11,331.44 -74.76
QQQQ: 38.48
RYVNX: 21.94
RYAIX: 24.28
RYCWX: 41.94
TLT: 87.26
BEGBX: 13.66

Wednesday, September 06, 2006

Grrrr....

After Tuesday evening’s announcement by INTC that they were going to reduce their workforce by about 10,500 by sometime next year, the market opened weak.  Although the analysts were bullish on the INTC news (please), the stock still dropped several percent over the course of the day.  Another report about productivity and labor costs did get primary billing during the day due to the increase in labor costs.  Some would think that the Fed may have to raise rates again if labor costs start moving up too fast.  At least that’s what the media thought all day.

We, on the other hand, have been waiting for a day like this for a few weeks and don’t really think the news was the driver of prices on Wednesday.  Instead, we see the sheer overbought nature of the market as being the best indicator of a turn being at hand.  As the title implies, could you hear a bear growling on Wednesday like we did?  

Whatever the reason, the stock market was down and we think it is just the beginning of what could be a long downtrend.  One of our reads suggested that the current environment seems a lot like the summer of 2000.  You may recall the situation was that the major indexes all peaked in early 2000 and suffered a fairly substantial decline going into the early summer.  Then they bounced strongly into the late summer just like we have seen the last few months.  After that we saw about two years of declines with the worst of it happening between September and the end of the year with further selling most of 2001 culminating in the 9-11 reversal to the upside and then a further decline into the fall of 2002.

We see the similarity even though the prices are not quite as outrageous in the major indexes that we were seeing back in 2000.  The smaller stocks today do show similar signs of over priced conditions, such as the Russell 2000, RUT.  The RUT bottomed in that fall 2002 period at about 325 and in May this year had risen to nearly 785, a magical run of nearly 150%.  We would be very careful if we were in small cap type mutual funds, as we think there could be a huge retracement of this incredible rally.  Understandably the participants have been enjoying the obvious benefits of the small cap boom in the face of relatively less movement in the major indexes.

The stock market should be avoided near term as we sort out how this next drop will affect the major averages.  At the moment we could speculate but we prefer to get prepared for the fall that is coming.  We have thought that there might be a rally point for us sometime in the next few months but we are going to put those thoughts on the back burner for now as we concentrate on the near term drop in prices.

The time for caution is here and we recommend a very low risk deployment of funds.  What this means is that we think the time is right for selling rallies.  Yes, we know that one day does not a trend make but we do think there is clear warning in the technical indicators to warrant our positions: low volume, inability to take out recent old highs, overbought technical indicators which are weaker than the past overbought situation back in May.  We could go on but you get the basic idea.

Dow Industrials:  11,406.20  -63.08
QQQQ:  38.67
RYVNX:   21.73
RYAIX:  24.16
RYCWX:  41.38
TLT:  87.09
BEGBX:  13.71

Tuesday, September 05, 2006

Market Over Bought

Today’s stock market defied gravity for another day, again on low volume.  Something new happened in the volatility index, it went up in the face of Tuesday’s rally.  Normally, the VIX would drop against a rising market, so there does seem to be some interest in the other side of the bull trade.  Time will tell and we don’t think that much time will be needed.

We want to focus on the market this evening because today’s news just isn’t worth going through. The stock market has now managed what we would characterize as a strong retracement of the decline we saw from May through mid-July.  Our favorite index, the NDX, just completed a 50% retracement and we think that should be quite enough thank you.  Actually, the rally in mid-August took the index up to 1584 from the July low of 1446.  Now, we see a little bit of an improvement on that 1584 today with the index moving above and closing above 1600 at 1603.  For this index, there has been very little extra upside since that 1584 about three weeks ago.

Tonight, we are more adamant than ever about the market being ready to go down.  If there was ever a time that the market was overbought and the players were over confident, or complacent, this is it.  The market is “celebrating” the job cuts at INTC by rallying the stock during the day, only to face some of the music after hours.  These stocks are inflated and need to be taken down and we think the next couple of months will be painful for the bulls.

The best we can say for us bears is that we haven’t suffered too much with all of the hype surrounding this late August rally.  Yes, the move from 1480 to 1584 in the NDX was a little painful but since then, there has been little impetus to reverse our course.  In our Sunday August 27th post we mentioned the Spring high points in the three indexes we follow and continue to believe they will be in place for a long time.  We would have to reconsider our position if any of these highs was broken but since we are mostly in the NDX, we don’t feel a strong sense of urgency to exit our positions.

Many stocks are at good prices to sell and we recommend doing just that with most of them.  If you can’t do that, then take the opportunity to write some covered calls against them right now.  We would suggest a more aggressive hedge program than that if we thought you might consider it.  First, we would recommend selling stocks; second, if you can’t do that, sell some covered calls; and, third, get aggressive and buy some protective puts on your positions.  Feel free to ask questions in the comment section if you would like more information on any of these strategies.

Dow Industrials:  11,469.28  +5.13
QQQQ:  39.46
RYVNX:   20.89
RYAIX:  23.69
RYCWX:  40.91
TLT:  87.26
BEGBX:  13.75

Monday, September 04, 2006

Happy New Year

Last Friday’s jobs’ report was just right, the Goldilocks’ scenario played out perfectly for the market.  There were just enough jobs to make sure that the economy was still moving forward but not too many to cause the Fed to push up interest rates.  As far as the manufacturing data, those numbers were still in growth mode but not anything that would disturb the Fed.  So, on yet another low volume day, the market managed to surge ahead.

Our best guess is that the market will have trouble maintaining this lift over the next couple of months.  We do tend to be bearish when it comes to the fall period of time and this being the middle year of the presidential cycle, we are even more bearish.  That strategy has not served us too well over the past month or so but we are standing our ground and may be adding to our short positions.  We don’t have too much cash available because we are already committed in most of the funds but what we have left seems to be destined to enter the market this week.  In case you were wondering, we were going to sell into these higher prices, not be long stocks.

We should get a good look at what the market thinks over the next few days and we will certainly be back here to let you know our thoughts.  In the mean time, make sure you take the opportunity of the “new year” for a fresh start for your portfolio and see how you can improve it.  We would think there must be some things you would like to improve upon.  

Dow Industrials:  11,464.15  +83.00
QQQQ:  39.08
RYVNX:   21.26
RYAIX:  23.90
RYCWX:  40.94
TLT:  87.76
BEGBX:  13.80