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

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