Tuesday, October 31, 2006

The End of October

Tuesday ends October and possibly begins a fragile period for the stock market.  The last day of October represents the fiscal year end of many mutual funds providing the last chance for some managers to adjust to their best portfolio.  Many of them have huge compensation packages based directly on performance so this day can be a little interesting.  We can’t comment on how significant today was due to this activity but the volume did pick up just a little bit from the last few days.

We think the window of opportunity for the stock market to show its vulnerability is the rest of the week.  Given that the jobs’ report is due on Friday, we have already made a mental note of the importance of this week’s report.  The ideal situation for us would be for the market to go into a holding pattern for two days and then open strongly on Friday.  That would be a good signal to us but we usually don’t get such nice signs from the market.  We’ll need to use some good judgment.  

As for the trading day on Tuesday, there was some motion seemingly related to news, which is odd in itself.  The number of most concern was the employment cost index which was up 1.0% for the quarter compared to the consensus view of 0.9%.  Another number of concern was the consumer confidence number which came in below expectations, 105.4 versus 108.0.  Lastly, the Chicago Purchasing Managers Index came in well below expectations of 58.0 at 53.5.  Last month’s number was 62.1 so a fair bit lower.  All of these numbers were considered and then dismissed as the market basically decided to trade on something else after the news.  For a while, though, these numbers mattered a little.  Wednesday brings us an important housing number, pending sales and we are interested to see what the market will do with that one, whatever it is.

We can appreciate the fact that this market has been less than fun for the past several months but we expect that to change very soon.  When it does, we probably will wish we were back in these days of denial.  Till then we are going to be vigilant.  After all, we do have some funds left to deploy, not a lot, but some.  

Dow Industrials:  12,080.73  -5.77
VIX: 11.10
QQQQ:  42.58
RYVNX:   18.12
RYAIX:  22.15
RYCWX:  37.41
TLT:  89.81
BEGBX:  13.85

Monday, October 30, 2006

WMT Holds Down the Dow

The stock market started the week with a whimper as WMT (Wal-Mart) announced October comps of only 0.5%. Sometime in the last few weeks WMT lowered guidance from 2%-4% down to 1% and now this announcement to 0.5%. WMT got off to a poor start and helped drop the Dow about 25 points in the early going, since WMT is a Dow component.

After this initial drop, the market forgot about the troubles at WMT and the troubles in tech from last Friday. There was an upward bias such that the Dow was up 35 points in the early afternoon. Some of this may have been due to the drop in oil of around 4% during the day but that can’t really be known. We don’t think the market pays much attention to any outside influences at the moment.

That said, there are some news items coming this week, the big one being the jobs’ report but there are some others. Tuesday brings the October Conference Board’s consumer confidence numbers with consensus being for an increase to 108 from 104.5. At the same time, the Chicago purchasing managers’ index is expected to show a slight drop from 62.1 down to 58. On Friday, the jobs’ report is supposed to show an increase in jobs of 125K versus last month’s 51K. We will keep highlighting some of these news stories during this time while the market doesn’t seem to care much about the news.

We have tried to separate the market from the news in general just because we think the movement of the stock market doesn’t really depend on what’s going on in the world so much as what’s going on in the minds of the traders and the liquidity factors, neither of which we know much about. The pattern of trading is only reflected in the prices and some of the underlying technical factors. One factor on Monday was volume which was anemic again.

Right now the stock market is trying to continue a string of upward movement that has lasted a long three months and must be getting tired. We see that Tuesday is Halloween, the last trading day of October and Friday is the jobs’ report. Since the market is Due for a correction, this would be a nice time for it. For now, we wait.

Dow Industrials: 12,086.50 -3.76
VIX: 11.20
QQQQ: 42.48
RYVNX: 18.21
RYAIX: 22.20
RYCWX: 37.36
TLT: 89.12
BEGBX: 13.76

Sunday, October 29, 2006

Goldman Sachs Sacks the NASDAQ

We have just some quick observations of Friday’s action.  The market heard the news about the GDP just prior to the opening bell.  The GDP wasn’t quite as strong as the early estimates.  We try to be a little cautious talking about the GDP since there were some lowered expectations, around 2.0% versus last quarter’s 2.6%.  The number came in at 1.6% even with a much lower inflation component than second quarter.  The inflation number was 1.8% in third quarter compared to 3.3% in the second.  We mention this because we think it’s important to look at the growth factors and how they are affected by the inflation factors.  

We know it’s an oversimplification of the way it works but what you can do is simply add the two numbers together to get “gross” GDP before inflation.  So, now we can do a rough comparison of second and third quarter “gross” numbers.  The second quarter was GDP, 2.6%, plus inflation, 3.3%, for a total of about 5.9%; and, third quarter was GDP plus inflation of 1.6% plus 1.8% for a total of 3.4%.  We also know that the inflation numbers are somewhat suspect but that’s a whole other story.

On the back of the GDP numbers the bonds were pretty happy and the stock market sagged a bit going into the opening bell.  Once the bell rang, the stock market fell for about 15 minutes before starting the normal buying that we have become accustomed to over the past several weeks.  However, about mid-session, according to Bloomberg news “Goldman Sachs Group Inc. reduced its forecast for motherboard shipment growth this quarter, saying demand is ‘falling off a cliff’ and portending a broader slowdown in sales of computers and components.”  This news seemed to bring a chill over the tech stocks.

The NASDAQ 100, NDX, our index of choice was trading around 1740 down about three points but started heading down bottoming about an hour before the close near 1712 for one of the steepest drops in this index since the July lows.  The big question is, “Does this mean anything?”  

The stock market has gone up for some reason in the past few months and maybe it was the possibility of a good election (whatever that is) or the Fed was done or the “fact” that the fourth quarter is good for tech due to seasonal buying, or more simply the shorts were being squeezed (which we were).  At any rate, maybe one of the tenets of a higher market took a little dent after Goldman announced that motherboard sales “fell off a cliff”.  We think that one day of trading doesn’t mean much due to the huge non-stop rally we have seen for three months; plus, the chart doesn’t really show any violation of the upward channel.  

We do have to say that there are other things to look at.  One of those things is the annual measuring stick for the mutual funds occurs normally at the end of October so there may be less impetus to push some of the various stocks.  Two, the market is overbought, which doesn’t mean it will sell off to correct, just that it is overbought. Three, there are tech dreams going on right now which did get a wake up call on Friday.  Four, there is very little real leadership in this market.  

For the bulls’ part, there are things in their favor, too.  The main plank in their platform (this is as close to politics as we like to get) is the mere fact that world wide liquidity seems to be bubbling over.  We understand that liquidity is based on a lot of credit and that it can quickly dissipate, but for now it seems to be enjoying a long reign (does that contradict the earlier political metaphor?).  Other factors for the bulls include pure momentum in the market and strong bullish sentiment.  We don’t think these have much resolve in the long run but here in the short run, they rule.  We remain bearish.  

There are several economic items of interest in the coming week with the most prominent one being the jobs report due out on Friday morning.  This report has been one of our favorites as it marks the end of the Bullish period most every month, or so we think.  There are other news items out there and we will probably bring them up as the week progresses.  BE CAREFUL out there.

Dow Industrials:  12,090.26  -73.40
VIX: 10.80
QQQQ:  42.21
RYVNX:   18.42
RYAIX:  22.33
RYCWX:  37.32
TLT:  88.87
BEGBX:  13.74

Thursday, October 26, 2006

Mind Boggling

Well, there you go; the NASDAQ Comp broke its April 19th high and in the process has managed nearly a 20% gain since the summer lows. We here at the Update are quite surprised by this feat. When a pile of money gets thrown at the market the market goes up. It seems the market has not exhaled for about four years even though we know there was a drop from the spring highs to the summer lows.

Even though the market continues to dazzle the public with its headliner highs, we feel that there just hasn’t been a good entry point. We have said this type of move is like a bull market, when buyers just can’t get in. The problem with this rally is that there never really seems to be any urgency to get in.

Today’s news on housing didn’t even really put a dent in the rally. The headlines were pretty bullish but we don’t think the news was bullish at all. The announcement that new home Sales were up for the second month in a row was the key number on which the market focused. The market assumes that the worst is behind us with regard to housing. The rest of the story was that home builders had probably slashed prices and given freebies to buyers. The average price of a new home dropped about 10% for the past year.

Thursday we heard that durable goods surged 7.8% but that stripping out commercial airline orders durable goods were only up 0.1%. So, the media found something for the bond market to cheer about and the stock market to cheer about. Fascinating. After the market closed MSFT announced fairly good earnings but not such great fourth quarter guidance. Not much going on with MSFT anyway but we thought we’d add it here, just more bullish news for the market. Right.

Wednesday’s news from the Fed confirms our belief that the market has nothing to fear from the Fed. They will not be doing anything to disrupt the cruise the stock market is on, especially going into the elections. We should have seen this as the clue back when the Fed announced that it was pausing. The precious metals complex continues to like this out to lunch Fed with inflationary pressures on.

Friday we get to see the first estimate of the third quarter GDP. We can see the headlines now, GDP down slightly but the Fed has engineered a soft landing helping to ease inflationary pressures.

The market remains extremely overbought and the VIX is in a holding pattern where no one, no one, has any fear for a market correction. BE CAREFUL.

Dow Industrials: 12,163.66 +28.98
VIX: 10.56
QQQQ: 42.82
RYVNX: 17.86
RYAIX: 21.98
RYCWX: 36.84
TLT: 88.46
BEGBX: 13.65

Perfect Fed

As you know by now the Fed declined to change interest rates this go around, not much surprise to anyone. We thought you might enjoy their statement, in case you haven’t or don’t read such things. Here is their statement:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

"Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.
Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

"Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

Here is ours from the last post:

The Fed will remain in a holding pattern on interest rates and they will warn that inflation could be a problem going forward but that they stand ready to fight it…blah blah blah.

Seriously, which one do you like better???

Well, the market reaction was almost a non-event. There was a little spike and drop right after the announcement but then the market just went on as if nothing had happened, pretty much the way it’s been trading for about three months. Nothing seems to affect this market negatively for long. While normally this would suggest a strong bull market, the actual trading is fairly quiet.

The volume of trading in Wednesday’s session was a bit higher than it has been in the past few months with only a few days of more volume since the July lows. We’re not sure if that really means anything but we will keep our eye on it.

The precious metals market seems to have started to come to life as the Fed warns of possible inflation and then says they won’t raise rates. This seems the perfect environment for the precious metals complex. We still believe there will be one more spike down that we will want to jump on so for now we are waiting for better prices, which may not come.

The one item we wanted to mention from the news on Wednesday is the existing home sales being down 1.9% after a drop last month of 0.5% which followed four months of declines. Said another way, the existing home sales have fallen for six months in a row. In that same report, we find that the median sales price was $220K versus a year ago’s $225K. This drop is not happiness for those people who bought in the past year or so. The good news in the report was that inventories fell 2.4% last month but those inventories still represent 7.3 months of supply at the current pace. This compares with a 4.6 month supply a year ago. So, there are still some pressures on the housing market.

[Editor’s note: Due to technical difficulties with the website, we were unable to publish our post until morning. We generally try to have the post up by 11 o’clock Central Time.]

Thursday morning: We see that Pulte Homes reports a 52% drop in quarterly earnings. They report that earnings were affected by high inventory levels and lack of buyer confidence. How do they know that?

No lack of confidence in stocks this morning as our futures are up again during the night corresponding to the European opening. We’ll see what happens but any time we have a strong opening, there remains the possibility of a reversal, maybe we should say “the” reversal.

Dow Industrials: 12,134.68 +6.80
VIX: 10.66
QQQQ: 42.43
RYVNX: 18.21
RYAIX: 22.20
RYCWX: 37.01
TLT: 87.89
BEGBX: 13.54

Tuesday, October 24, 2006

Wednesday is Fed Day, So What?

In our last post, we didn’t know that TXN (Texas Instruments) had published their earnings. TXN reported an 11% gain in third quarter profit but made some discouraging remarks about higher end cellphone sales. The stock dropped just marginally in Monday’s after hours trading and then just drifted down in Tuesday’s trading such that it ended down about 4% by the end of the day.

TXN’s news and downward price movement seemed to push tech stocks down a bit over the course of the day. The low of the day came around noon CDT and then the steady rally came back to help ease the NASDAQ losses; but, there was a late drop in those indexes and they closed on a weak note.

After the market closed on Tuesday, AMZN reported and whatever they said caused the stock to jump about 15% in the after hours market. We are not sure we understand the reason for the jump since the company reported that third quarter profit dropped 37% but rally them they did. The company said that it would slow its rate of investments in new projects which could increase profits??? Is that the reason for the rally? If you are spending money on new projects that will add to the bottom line long term, that would seem to be a good thing. Cutting back on these types of projects to bolster current income seems considerably short sighted. But, the market seemed to like it enough.

Getting back to market action, we did see a mixed result on Tuesday that left the NASDAQ indexes down about 0.50% and the Dow up 10 points. The Dow put on an indifference show as the NASDAQ tech world dropped. The Dow traded in a narrow 30 point range while the NASDAQ Comp traded in a 20 point range, much more volatility than the Dow.

So, tomorrow the Fed will make its decision on interest rates. Drum roll please… Actually, no drum roll is necessary. The Fed will remain in a holding pattern on interest rates and they will warn that inflation could be a problem going forward but that they stand ready to fight it…blah blah blah. We expect very little reaction to their announcement. There could be some big action if they raised rates but the market has dictated that they will not raise rates so they won’t. This news almost doesn’t deserve reporting anymore.

In any event we will see how the market reacts to the "big" news out of the Fed. In the meantime we will be watching for the other news, that being the MBA refinancing index in the morning and the existing home sales for September in mid-morning. Thursday brings us the durable goods orders and new home sales both of which are important to us. Friday morning we get to see the advance 3rd quarter GDP. This could be an interesting number.

We wanted to mention that the True Contrarian has finally published another post in case you are interested in what he has to say about the gold market. We noticed that the gold market started off quite soft this morning and rallied all day. Not only that, the HUI, our gold mining index of choice, has been strong for the past few days. We are getting more interested all the time.

Dow Industrials: 12,127.88 +10.97
VIX: 10.78
QQQQ: 42.13
RYVNX: 18.48
RYAIX: 22.36
RYCWX: 37.02
TLT: 87.20
BEGBX: 13.49

Monday, October 23, 2006

Fed Hoping for Goldilocks

The stock market opened the week with a bang, the Dow up 114 points leading the charge. The stock market keeps inching up and, while you may think 114 points isn’t inching up, we do not see that much strength in a move like this. The broader indexes have been struggling to keep up with the Dow.

We are in no shape to understand this move and do not try to. The bond market has been dropping and it dropped on Monday, with the Fed meeting starting on Tuesday. Here is a quote from the WSJ online version:
“Equity investors seem little concerned about the Fed, which stopped raising rates in August after 17 straight quarter-point increases. While policy makers are broadly expected to leave the federal-funds target rate unchanged at 5.25%, some are concerned the Fed may express concerns about inflation and hint at the chance of future rate increases.”

We have said it here many times, the Fed has lost its power with the market. When they decided to pause their interest rate hike campaign, the stock market figured it was open season with no watch dog in sight. “…some are concerned the Fed may express concerns about inflation and hint at the chance of future rate increases.” The market has No Fear of any of this.

We believe the only way the Fed can get its power back is to raise rates again. We don’t see this as feasible this week due to the proximity of the elections. In fact, we don’t think the Fed has the ability raise rates in this environment at all. They are trying the tack of jawboning the market lower by “tough talk” on inflation and the possibility of a rate hike. This is not going to be effective at all and hasn’t been so far.

5.25% will have to do for the foreseeable future until the Fed can figure out what’s going on with the economy. The housing market is going down and the Fed is keenly concerned about that. It knows the pitfalls of pushing down on housing. They are wondering why the stock market is going up when it’s not supposed to be. They are watching the bond market with its recent inclination to go down (pushing up interest rates). Wage pressures are starting to show up and along with them, inflation doesn’t seem to be going down. They are Hoping that the economy will slow just enough so that they don’t have to do anything drastic, like raise rates. Goldilocks is difficult to find between a rock and a hard spot. Meanwhile the stock market is partying.

Dow Industrials: 12,116.91 +114.54
VIX: 11.08 (up with the market?)
QQQQ: 42.43
RYVNX: 18.22
RYAIX: 22.20
RYCWX: 37.08
TLT: 87.20
BEGBX: 13.48

Sunday, October 22, 2006

Friday Was CAT and GOOG Day

Last week the stock market pretty much marked time even though the headliner Dow did break above the magical 12,000 level and now has stayed there for two days in a row. With options expiration on Friday, we though there might be some volatility and we did get a modest amount but nothing worthy of mentioning. In fact, the volume was just average making even the price moves, small as they were, meaningless.

To be sure, there were a few outstanding performances on what seemed like good earnings to Wall Street. GOOG was the notable winner in this category last week, jumping 33 points on Friday, almost 8%. We note that GOOG traded strongly higher but still under the all time high price closing around 460 with the high at 475. Granted, this miniscule 15 points does not seem like much given Friday’s 33 point advance, but the fact remains that it is still under its high with the Dow at new all time highs. GOOG has been the darling of so many Wall Streeters and Friday was an important GOOG move but it failed to ignite much follow through in the rest of the market.

The markets all opened stronger on the back of GOOG’s news but almost faster than they jumped on the news, they fell. About five minutes into the day, the Dow was up about 40 points and from there it dropped 100 points so that it was down about 60 on the day. For the rest of the day the Dow clawed its way back up to close only down about 9 points.

One of the biggest leaders of this market rally over the past three or four years, until May, that is, has been CAT (Caterpillar). This stock climbed from around 18 four years ago to 82 in May of this year, a stunning run. You might think that CAT would be one of the stocks taking the Dow to this new 12,000 level but, no, CAT has only brought it up, or held it up so that it could get to new highs. CAT fell 14% on Friday, based on difficult earnings, to 59. CAT is a Dow component and now has put a drag on it since May to the tune of 23 points, losing nearly a third of its value. These are not the kind of things that happen in a bull market.

CAT is not the only casualty of this earning’s season; there have been many land mines that have caused stocks to blow up. True enough, there have been the plus stories like GOOG, but there have been negative stories as well.

In the coming week, we have the Fed Meeting with an interest rate “decision” on Wednesday. Normally, this would be the biggest news of the week, but we have concluded that the Fed is a big non-event to the market anymore. The market has started to mostly ignore the Fed, pretty much knowing they will not raise rates. Even with the saber rattling that Bernanke has been doing this past week, there will be no rate hike this week or again for the foreseeable future as far as we’re concerned. I know the Fed doesn’t like to lose power but I don’t think there is anyway they would upset the apple cart a couple of weeks before the elections with a rate change of any kind.

Other economic news that we get this week will include more earnings as well as September existing home sales on Wednesday and new home sales on Thursday. Durable goods orders are released on Thursday morning before the market opens and could give us a signal as to the strength of the economy. We’ll see how the market responds to these various items as they are released.

Thanks for the comment, Erick. When the other shoe drops, it will be loud.

Dow Industrials: 12,002.37 -9.36
VIX: 10.63 (very low again)
QQQQ: 42.00
RYVNX: 18.57
RYAIX: 22.41
RYCWX: 37.79
TLT: 87.55
BEGBX: 13.57

Thursday, October 19, 2006

Dow 12,000

As we write tonight, there really is only one story that matters, GOOG.  There were other earnings related movements on Thursday, such as C (Citigroup) and DELL (losing market share to HPQ, Hewlett Packard) but these stories pale in comparison to GOOG.  The stock trended up for most of the day and then powered up after reporting strong earnings.  During the day, GOOG was up almost 7 points to 426 but after the announcement, GOOG moved up 32 more points to close at 458 in after hours trading.

You thought we were going to say the only story that matters is the Dow crossing and finally closing above 12,000.  Well, the media seems to think this is a big deal but as you know, we think the Dow moving to new highs all by itself is more bearish than anything.  With the Dow above 12,000, there is a sense of power in the bulls, not just optimism.  The way GOOG traded in the after hours gives you a sense of just how speculative this move is.  No one fears for any reason.  

This seems to run against the people who have lost money in many of the stocks that have taken hard hits just this past week due to earnings, not to mention the downdraft that affected many stocks from early May to late July.  Some of those stocks have not recovered.  Most people are looking at their mutual funds balance and asking “Where is the new high in my fund?”  

Friday is options expiration for October and, given the movement in the after hours market, Friday could be a wild day.  These are the type of days when traders can either lose or make a lot of money.  We generally like the scenario of up mornings leading to exhaustion and lower prices later in the day.  Right now there doesn’t seem to be one reason to sell stocks but we are recommending just that.  The whole concept is to Sell High, remember?

The lone item of news that didn’t seem to do anything for the market was the LEI, leading economic indicators.  Expectations were for a 0.3% increase but they came in up only 0.1%.  The coincident indicators were flat.  

Confidence is running fairly strong right now on the back of the Dow’s 12,000 but we recommend caution in these carefree days.  To us, it’s like climbing a mountain.  Once you get to the top, you take a little rest and look around and then you come down.  It’s only a matter of time.

Dow Industrials:  12,011.73  +19.05
VIX: 10.90
QQQQ:  41.90
RYVNX:   18.62
RYAIX:  22.43
RYCWX:  37.69
TLT:  87.64
BEGBX:  13.57

Wednesday, October 18, 2006

12,000 Attained, Briefly

The stock market got off to a bang on Wednesday morning on the back of IBM and INTC with a little help from the moderate CPI, presumably.  With no possible problems in sight, the stock market, as measured by the Dow, jumped out of the blocks managing nearly 100 points in the first fifteen minutes of trading and trading above 12,000 for the first time.  (Did you all get your party hats out to celebrate?)  IBM was up about 5 and INTC was up about 75 cents in the early going to help push up the Dow.  

The situation was ripe for a reversal and a fairly good one ensued but that was mostly in the NASDAQ indexes which seem to be a bit weaker than the Dow.  In fact the NDX, the NASDAQ 100, our favorite index, nearly showed us an outside down day but couldn’t hold the lows of the day in place in order to make that happen.  We do think that there will be plenty of reversals like we saw Wednesday morning as the bear market takes hold.  There will continue to be a lot of optimism from the new Dow high euphoria in the early part of many trading days; but, the bear will maul those highs as the day wears on.  But, we are getting a bit ahead of ourselves…

Back to the CPI, we see that the overall rate was a drop of 0.5%, which of course is now becoming the headline number because it is negative.  While it was higher, due to higher energy prices, we focused more on the “core” rate.  Well, the core rate was up a bit, 0.2%, for the month right in line with expectations and the same as last month.  This report was mostly construed as positive for stocks as we said earlier and helped that 100 point spurt in the Dow.  

One of the biggest shocks in the news was the housing starts.  We are still in shock this evening as those starts were up 5.9% on expectations of a fall of 1.2%.  Now, let’s see the logic in that.  Housing inventories are near record highs, prices are falling, mortgage rates have moved up slightly.  That doesn’t sound like a perfect environment to add more supply but that’s exactly what the builders did???  In line with something closer to rational was the housing permits number falling 6.3% so maybe the housing starts figure is just an anomaly.  

In other housing news, we see that the WSJ may be publishing an article titled “More Home Loans Go Sour” with a subheading of “Though new data show rising delinquencies, lenders continue to loosen mortgage standards.”  As you can imagine this flows down the same river that the Update is on so we are bringing it to your attention.  If you can find it in Thursday’s WSJ, please take a minute to read it.  Otherwise, here are a few highlights:    
The increase in the number of past-due mortgages “is particularly notable because bad loans normally climb when the economy weakens and job losses rise, leaving more borrowers unable to make their monthly payments. By contrast, the latest increase appears to be more closely tied to looser lending standards, borrowers tapping their equity and slowing home-price growth. ‘We're seeing rises in delinquencies and loan losses that are unrelated to what's going on in the job market,’ says Mark Zandi, chief economist of Moody's Economy.com. ‘It's very unusual.’"

There are some earnings news that we wanted to discuss but have run out of time and space.  The big ones on Wednesday were EBAY and AAPL (Apple Computer) which gave good results but said they weren’t sure about them and they may need to be restated, ok.  Thursday we’re supposed to get GOOG and Nokia (NOK).  These both should be interesting due to the news out of YHOO and MOT.  We’ll discuss them tomorrow.

We note that today’s trading was the Wednesday of options expiration week and there normally can be a reversal of early week action going into Friday.  We are not sure what that means this week as we see the Dow up and the NASDAQ indexes down so we’ll have to just watch what happens.

Dow Industrials:  11,992.68  +42.66
VIX: 11.34
QQQQ:  41.80
RYVNX:   18.73
RYAIX:  22.50
RYCWX:  37.81
TLT:  87.80
BEGBX:  13.49

Tuesday, October 17, 2006

PPI a Non-Event

Lots of big news and some downside stock market action on Tuesday. The PPI numbers, released just prior to the opening, showed a mixed bag. The overall number was a large negative 1.3% but the consensus was for a drop in the neighborhood of 0.7%. Then the “Core” number showed a different picture, that being a rise of 0.6% with expectations of a rise of 0.2%. The directions of the two numbers were similar to expectations but the magnitude gave rise to some interpretation. The drop in gas prices seemed to explain the big drop in the overall PPI while the “core” PPI increased due to expiring incentives for cars. Really??? In other news, industrial production was down much more than expected giving the “Fed is done” more credence but not enough to help the stock market at the opening.

As the market opened, there was a large thud as the NASDAQ started the day down about a half of a percent and continued to drop into late morning so that at its worst it was down 1.5%. Of course, then there was the magical rally that appeared since we had obviously taken care of any problems reported earlier in the day. Please.

After the market closed we heard from several important tech companies as IBM, INTC, YHOO and MOT announced their third quarter earnings and gave some guidance for the future. IBM brought a substantially better number to the party than was expected and that stock jumped in after hours. The price went up about five percent, from what we saw, and if it opens there on Wednesday will wipe out the entire loss the Dow sustained on Tuesday, all by itself.

INTC’s headlines were trying to be bullish even though the market has been expecting good earnings from them. The WSJ’s headline says “Intel shows signs of steadying after rollout of new products” with a subtitle of “Softer demand hurts net, but chip maker’s sales, profit exceed forecasts.” That article says that “INTC reported a 35% drop in third quarter profit but showed signs of mending problems that have been ailing the world’s largest chip maker.” (You can read the article in Wednesday’s WSJ but I don’t have a page number.) INTC jumped a little over 1% on the news after being down over 3% in regular trading. We find the opportunity of INTC being over 20 a remarkable feat of magic, one that won’t last too long; but, for now, the company has managed to say the right things. We’ll see how it trades in regular trading on Wednesday.

As for YHOO and MOT (Motorola), the news wasn’t quite as good but only MOT dropped on the news. MOT quickly fell about 10% on their news but managed to crawl back to finish after hours trading down about 7%, still a poor showing. YHOO was down initially on their news but managed a quick turnaround and closed nearly 3% higher in after hours trading.

Wednesday brings the September CPI and housing starts. From our view, the stock market has stopped caring about either of these numbers. The reason for not caring about the CPI has to do with the FED’s current lack of ability to raise rates any time soon. If the CPI numbers come in lower than expected, there might be a passing thought about lowering rates sooner but there is No thought of a rate hike next week. Housing starts are largely considered to be “old” news by the market. Yes, prices have dropped, exotic mortgages have taken a toll, and housing starts have slowed: The market seems that all of this information is fully discounted. We will see.

Tuesday’s action was the first break in the upward trend we have seen for a little while. The headline Dow was not down much but the NASDAQ indexes were down nearly a percent at the close. Admittedly, these are small breaks but we bears have to start somewhere. The momentum indicators remained over bought at the end of the day while the volatility index moved up a bit as it should when the market goes down. The other thing to remember is that options expire this week and this event can cause some weird trading over the course of the next few days. Tomorrow is an important day after the earnings news we heard Tuesday evening.

Dow Industrials: 11,950.02 -30.58
VIX: 11.73
QQQQ: 42.00
RYVNX: 18.53
RYAIX: 22.38
RYCWX: 38.07
TLT: 87.62
BEGBX: 13.51

Monday, October 16, 2006

Low Volume Monday

The stock market managed to do practically nothing on Monday as investors the world over are patiently waiting for the next celebratory move above 12,000 in the Dow. As we look at the day’s trading, the Dow made some slightly higher prices during the day while the volume again was light. There doesn’t seem to be much conviction about this rally. The market is getting tired and rightly so. Our momentum indicator is now well over bought and due for at least a correction.

We are a bit surprised by the lack of volume right here. We normally figure the stock market will find supply at some point, due to the higher prices, and that creates high volume days near the end of a move. The light volume is almost eerie. We’re not sure what to make of it, could mean that supply has not felt compelled to sell.

This could be an important week due to the news items as well as the options expiration on Friday. Tomorrow brings the PPI and Wednesday brings the CPI. Wednesday also brings the September housing starts and Thursday the leading economic indicators (LEI). We think the really big event is the options related trading that will happen this month. The broader market has gone to new relative highs and the options being in the money should create some volatility.

Here we are in the middle of October and we are starting to get the third quarter earnings reports. This time of the quarter can be important for the stock market especially if the news is different than Wall Street thinks, good or bad. As we generally say, it’s not the news but the reaction to the news that matters. This should be a very revealing week. We are aware that the news could still be acceptable to the market during this go around but if it’s not, then we could see some trouble.

Our position continues to be for you to hold cash and if you are long stocks to exit those positions in favor of cash. We see that rates across the curve are right around 5% giving you adequate return for your money as we wait for better opportunities. Right now we are watching the gold complex carefully for opportunities. Other than that, the market seems extremely overpriced and we recommend staying clear.

Dow Industrials: 11,980.60 +20.09
VIX: 11.09
QQQQ: 42.45
RYVNX: 18.14
RYAIX: 22.14
RYCWX: 37.87
TLT: 87.55
BEGBX: 13.47

Sunday, October 15, 2006

Dow Knocking at 12K

Friday’s stock market had a few news items to deal with such as the September retail sales report showing a drop of 0.4%. The reports were quick to point out that money spent on gasoline dropped nearly 10% and that most of that extra money was plowed back into spending elsewhere, all but 0.4% it would seem. The other major item was the University of Michigan’s consumer sentiment index which was up more than expected to 92.3 versus 85.5 last month. This is a curious number and shows that the public is certainly confident about their immediate lives.

Stocks closed the day up modestly with the Dow up about 12 points after a bit of a rocky start. Early on Friday, some of the big guns of the Dow got hit at the opening bell such as Home Depot (HD), GE and Boeing (BA). As the day wore on, the market managed to overcome those little problems.

We have done a little reading and considering over the past week and have come to the conclusion that the market is now showing its strength to the upside. To our way of thinking the market has not shown stunning strength but the Dow is making new highs. Underneath the surface we don’t see very strong technical foundations. One of those technical weaknesses is the volume which has just barely maintained average volume for the year. The other big technical weakness is that the prices don’t really seem to be going up very much.

There is very little market leadership right now looking at the new highs that are showing up on the list every day. The actual number of new highs as measured by the 5 day average highs is 20% below the same levels recorded in January and February. With the price of oil dropping about 25%, even the oil stocks are not leading the market anymore. The main idea is that the Dow is now trading at new all time high prices while none of the components of the Dow are trading at new all time highs.

With the prices advancing on the Dow and other market indexes we have a hard time arguing with the move in prices except that the prices are barely moving up. There are so many technical reasons for this result, many of which we have mentioned above. Other reasons include the bullishness factor or the complacency factor of the players. The recent rally has been accompanied by a boatload of bulls while the speculators are selling puts to push the volatility indexes down. We see in the numbers below that the VIX is now trading at levels very near the lows of the last several years. We can not get too bullish given all of these factors.

For those of you who are still in stocks, we think it would be a good idea to take a good hard look at these assets for possible sales. The market could go up a while here but you may want to take the time to find yourself exit points. For help in this matter, leave a comment in the comment section and we as well as our other readers can help with your investment questions.

From where we sit, the Dow is now the key to the world markets in general. As long as it is rising, every so slightly, the world can ride the wave. Once the Dow has stopped going up the world markets will try to figure out how to go down faster than the Dow. We are trying to prepare for this eventuality but this little detour of the Dow moving up has delayed the timing just a bit. We remain bearish, with its inherent current risk, but we feel that the biggest risk for stocks to go down.

Dow Industrials: 11,960.51 +12.81
VIX: 10.75
QQQQ: 42.43
RYVNX: 18.14
RYAIX: 22.14
RYCWX: 37.98
TLT: 87.16
BEGBX: 13.45

Thursday, October 12, 2006

Bulls Party On

We’re going to spend a few minutes on the news swirling around the market but the real news is the market action. We’ll save that for a little later. In early morning news, the trade deficit jumped to another record just under $70 billion. This kind of number should be noticed by the people but of course it doesn’t really affect the trading going on these days. That’s a problem for another day.

The trade deficit was summarily dismissed because so much of the number relates to our voracious appetite for foreign oil and as you all know the price of oil has recently dropped about 25% so that should take care of the trade deficit almost single handedly. Last month the trade deficit was $68 billion and expectations were for the August month to be a little less than that at $66.8 billion.

We said last month that the number of days in July and August is 31 and we think this is something pretty basic to the size of the deficit. The daily deficit is right around $2 billion and with one extra day in the month, the deficit can be fairly accurately calculated. Well, the economists know more than we do so we’ll see what the September deficit looks likes next month.

Later in the day, the Fed released its beige book, aptly named for the color of the report. The three main items in the report were that the job market is tightening but hasn’t produced much in the way of higher wages, the housing slowdown has been sharp but the consumer has not slowed their spending, and the falling energy prices have provided some relief but not in the form of lower consumer prices.

The Fed is scheduled to meet again in October and will likely keep their short term target interest rate at the current level of 5.25%. The Fed has been trying to talk tough in the past week or so because they see prices moving up. The market is not buying the tough talk anymore and is rallying in spite of the Fed’s tough talk. Still there is only so much money around to buy stocks with.

Today, the stock market seemed to find a way to bust loose again with the Dow jumping nearly 100 points to just under the magic 12,000 figure. It’s almost difficult for us to type this number on the page. It seems that we haven’t even really had any kind of meaningful decline and now the market wants to go screaming higher.

We said we couldn’t get bullish on this market until the VIX went up quite a bit. Well, it will come as no surprise to you that the VIX has been going down, not up. You may consider us to be fools but we don’t think you should be holding onto your stock positions or adding to new ones in a market like this. This is not what we call bargain prices and would be equivalent to buying high. Remember the rule is to Buy low and Sell high. Have a great weekend.

Dow Industrials: 11,947.70 +95.57
VIX: 11.09
QQQQ: 42.23
RYVNX: 18.31
RYAIX: 22.24
RYCWX: 38.02
TLT: 87.60
BEGBX: 13.49

Wednesday, October 11, 2006

Fed Minutes Don't Deter Bulls

In our last post we failed to mention that the earnings season got started on Tuesday evening with Alcoa (AA) being the normal first one to report their earnings.  The numbers were pretty good but not as good as Wall Street had hoped for and the stock was down in the early going on Wednesday.  AA closed the day down about 5% and helped the Dow close with a 15 point loss.  (AA is a Dow component stock.)

During the day, the market was hit with a couple of other items namely the Fed’s minutes to their last meeting and the plane crash into a high rise in Manhattan.  When this event was initially reported, some market participants sold stocks just in case it might be a terrorist attack.  The Dow dropped about 50 points in five minutes right after the news and then the confirmation that it was an accident sent the prices back up again.  

More important to the stock market was the news out of the Fed.  Their minutes indicated they were concerned about inflation due to several factors one of which is “a possible acceleration in labor costs.”  The market did show some signs of selling off right after the report but the plane crash kind of took the focus off the report and onto terrorists.  Then when the terrorists didn’t materialize, the buyers forgot about the Fed and went about their business of buying.

The CNN Money website posted the headline “Rough day on Wall Street” after the Dow closed down 15 points.  Some rough day indeed, fifteen points.  The bulls must really have been feeling roughed up after that drubbing.  We resort to sarcasm, and we apologize for that.

The facts are still out there and the market is choosing to ignore them at the moment.  We are definitely getting tired of this high point in the market.  We would like to see a sell off to see if it the move is worthy of a deeper correction.  The market is struggling to maintain these prices but it is maintaining them.  This is in spite of the craters that are occurring in some stocks like AA today.  

Right after the market closed the Realtors said that home prices would advance just 1.6% basis the median price for 2006 and sales would be below the 2004 and 2005 levels which were white hot, especially in 2005 when prices appreciated 12.4%.  Their prediction for 2007 was they “expect sales activity to pick up early next year.”  What else would the National Association of Realtors say do you think?  

Our momentum indicators have softened up here over the last couple of days which could mean that the bulls will need to come in buying pretty soon to move those numbers back to overbought.  As we have said, the time for a correction is right here.  A tough Fed and poor news from AA couldn’t make the market go down.  We’re not sure what will but something will.

Dow Industrials:  11,852.13  -15.04
VIX: 11.62
QQQQ:  41.54
RYVNX:   18.91
RYAIX:  22.61
RYCWX:  38.63
TLT:  87.58
BEGBX:  13.46

Tuesday, October 10, 2006

Epic Times for Bullishness

Tuesday the stock market mostly tread water with a little back and forth motion on a somewhat better volume, although not much better.  We note that the Dow surpassed last Thursday’s closing high by a whopping 0.48 cents.  Yippee.  That, along with the SP 500 closing 0.20 better, gives us cause to celebrate the new highs being made every day.  (Don’t you love sarcasm once in a while?)

With our analysis showing a slowing in the upward momentum and the prices only slightly higher, the market certainly looks poised for a bit of a drop very soon.  We are coming into the middle of the month here and the bullish time of the month is over for a few weeks.  There are some possible flaws in that thinking, like options expiration is not for another week, but for the most part our indicators are rolling over tonight.  

The bullishness is thick everywhere and we the contrarians feed on this optimism.  The market can not go to the moon and we can’t believe the bulls can be satisfied every single trading day.  Our theory has been that the housing market deterioration would take the stock market down with it has been slow to take hold.  Since the Dow made a new high today, you could say that it has been largely ignored.  

The housing market is still garnering some attention and we will continue to follow the industry over the coming months to see just how weakness there can and will run the stock market down.  However, in light of the current stock market environment, we are once again compelled to rethink our positioning, as we do most every day.  

We have seen how little the news affects the stock market of late and we know that the market does what it wants to when it wants to.  This brings us to the point.  The news associated with the market can only modestly affect the market.  Trading is the big thing that we need to watch.  The market can do what ever it likes on any given day but we try to focus on the underlying technical picture along with the fundamental story that makes sense.  To us the market has a lot more to say about what it’s going to do as opposed to what the media would like to think.

Every day we write about what the market is trying to say, sometimes we feel it’s an incredible foreign language.  On other days we think we have a pretty good idea of what’s going on.  For the last several weeks, this market has gone up regardless of what the underlying “news” is saying.  

The biggest news we can see is that the Fed is done raising rates, no matter what they say in the media.  Their tough inflation talk is due to one thing and one thing only, power over the markets.  What the Fed doesn’t yet realize is that it has lost its power.  The market has decided the Fed will not raise rates again and that the next move will be down sometime in early 2007 according to the futures.  This is a powerful stock market aphrodisiac and bullishness is the result.  We have never thought the baby step interest rate increases were very good but the timing of their pause has put us in an up trend in bullishness.  When will it end?  Well, we don’t think there will be much time to wait.  We are in an epic period of time and all of us will have front row seats to the coming rout.

Dow Industrials:  11,867.17  +9.36  
VIX: 11.52
QQQQ:  41.62
RYVNX:   18.85
RYAIX:  22.57
RYCWX:  38.51
TLT:  87.81
BEGBX:  13.48

Monday, October 09, 2006

Monday Leaves No New Clues

The North Korean threat did little to hold the market down on Monday as the major indexes were up another day.  Monday was a bank holiday and the bond market did not trade.  This may have been a reason for the exceptionally low volume on the NYSE, but the volume was extremely low on Monday.  Let’s keep an eye on that piece of information for Tuesday to see if it comes back again.

We don’t think that Monday’s action did much to change the landscape of the market and we will wait until tomorrow to make any more comments on the direction of the market.  We still feel the market is overbought and will continue our bearish stance.  We are expecting at least a correction from these Dow highs.

We are pleased to see the comment from Erick in our Sunday evening update.  We are listening to the Fleck interview as we are writing this and think it’s a great opportunity to hear one of the best short sellers in the business.  Fleck is someone we read everyday via a subscription to his Daily Rap.  It’s fairly cheap at $99 per year and he pretty much writes every day.  Web site is FleckensteinCapital.com if you are interested.  He does the Contrarian Chronicles on MSN Money once a week.  Go check out the website that Erick has given us.

Dow Industrials:  11,857.81  +7.60
VIX: 11.68
QQQQ:  41.55
RYVNX:   18.90
RYAIX:  22.60
RYCWX:  38.56
TLT:  88.51
BEGBX:  13.58

Sunday, October 08, 2006

Still Bearish

The stock market continues on its merry way with what seems to be little rhyme or reason. As we see our technical indicators, the momentum indicators are weak for this type of record high move in the Dow, the trend indicators like the moving averages show upward movements, but the underlying technicals are much weaker than they should be given where we are. One of those indicators is the amount of volume on the NYSE. The volume over the last week was higher than it’s been but on Thursday’s big move, the volume failed to get over 2 billion shares. We consider this volume to be one of the reasons to remain bearish.

It is true that the public does look at the Dow and gets all excited about the fact that it is at a new high. Some of our readers let us know that the Dow was making new highs this past week. Sometimes this is to make conversations with us but it does get to the heart of the analysis situation, the Dow is Not the market.

We try to predict the direction of the market here and we sometimes change our minds but we like to do so when the market gives us a signal for a turn. We trust the market to give us those signals before the price moves so we have time to be proactive on our trading decisions.

Right now, this market has gone overbought on the momentum indicators and has produced a new high in the Dow but we remain bearish tonight after looking at several of our indicators. We think there is a short term high in place as of late last week. The market should at least try to correct this advance and when it does we will be able to assess the near term direction of the market, whether that is truly up or in fact down.

We do think that people think the party will go on for a long time. This is called confidence, something that the market rarely gives to anyone until near the end of a move. Just around the corner are earnings reports from third quarter and we wonder what they will say and whether the market can sustain itself on the news.

We received a comment last week, which we failed to mention. You may have seen it but it’s from October 3 and includes a link to Michael Nystrom’s article in the BULLNOTBULL.com website. We recommend a quick look over there for a good read. This article comes in two parts and going to the first will give you a link to the second.

This evening as we get ready to post, we see that the North Koreans are saying they did a nuclear test. The overnight futures seem to be reacting negatively to that news even though the US has made a statement that the test has not been confirmed. We’re not sure if it means anything but wanted to mention it as it related to the overnight trading.

Dow Industrials: 11,850.21 -16.48
VIX: 11.56
QQQQ: 41.41
RYVNX: 19.03
RYAIX: 22.68
RYCWX: 38.59
TLT: 88.27
BEGBX: 13.58

Thursday, October 05, 2006


We are not surprised by the action in the market on Thursday. The big rally from Wednesday needed to be digested and the market is now expected to continue its rally. We’re not sure but the jobs’ report is supposed to be coming out on Friday morning so just about anything can happen.

Basically the market is “going up” and on any type of news there is. The price of oil can go up or down or sideways and the market can go up. The economy can be weak or showing strength or just plain tough to tell and the market thinks it’s a buy sign. This has been a difficult time to be bearish. So, we continue to beat our heads against the market.

For the first time in a long time (during this three month long rally), we see that the momentum indicators are overbought. This is not to say they can’t get more overbought, just to say that they are overbought. As you can see below, the volatility index, VIX, is still below 12. The combination of being overbought and low volatility implying high complacency on this rally should give way to at least a short term correction of the rally. Friday’s jobs’ report could provide the backdrop for a little volatility. We’ll see.

We are not big proponents that the market can be manipulated but we do believe that extra liquidity can be injected into the system. Usually extra money goes straight into the stock market and that’s what we think must be going on right now in front of the fall elections. We can not prove any of this but it sure feels like there is some extra money floating around to drive prices up the way they have the last few days. We do know that momentum tends to attract funds too so this market seems to be attracting funds in that fashion.

We just can’t believe the June/July lows in the Dow around 10,700 were supposed to be the lows of the year. But, here we are nearing 12,000 and those lows seem a distant memory. We will take a closer look at the information this weekend to see what we should be doing. Maybe the jobs’ report will give us some insight into the ways of this bull. Whatever we can do to make some sense out of this nonsense would be a good thing. Have a great weekend.

Dow Industrials: 11,866.69 +16.08
VIX: 11.98
QQQQ: 41.50
RYVNX: 18.91
RYAIX: 22.60
RYCWX: 38.45
TLT: 89.20
BEGBX: 13.70

Wednesday, October 04, 2006

The "Fed Will Ease" Rally

We’re not sure what to say this evening as the market has just busted loose to the upside, so to speak.  Prices jumped on Wednesday, as the combination of economic weakness and the hope for the Fed to start lowering rates brought buyers into the market.  We’re not really sure but the “Fed is done” rally seems to have given way to the “Fed will ease” rally.  Neither one brings us any understanding as to why the market continues this vertical run.  

We here at what seems like bear central have been getting punched in the stomach enough to feel it in the wallet.  This three month rally seems to be like the Energizer Bunny, it just keeps going and going.  Our speculation is that the market truly believes the Fed is now going to let things go.  With Fed Chairman Bernanke making comments about the housing slowdown causing the GDP to be 1% smaller than it otherwise would be, the market took that as a sign that the Fed was going to ease sometime early next year.

The ISM services index dropped to 52.9 well under the consensus of 56 and last month’s 57.  This news is taken as good since it now will lead to a Fed easing.  So, we see now that any news, good or bad, is bullish for the market.  Oil is up or oil is down, either is bullish.  Interest rates on the rise for over two years is bullish because at some point the Fed will have to stop and when it does stop, the future moves must be to start dropping rates so that’s bullish too.  All twisted logic to us.

The precious metals complex made an effort at a low on Wednesday.  Gold dropped about $15 at one point but after the normal trading hours for gold were over, it managed a nice rally which brought the HUI back from an 8 point drop under 275 to being up almost 3 on the day at 285.  We are going to watch this area for a possible bottom.  We expect a retest of these lows at least before a serious rally starts—but we have been wrong before.

Dow Industrials:  11,850.61  +123.27
VIX: 11.38
QQQQ:  41.30
RYVNX:   19.09
RYAIX:  22.71
RYCWX:  38.58
TLT:  89.83
BEGBX:  13.73

Tuesday, October 03, 2006

Nirvana Achieved

Ahhhh… Doesn’t that feel better, to have the Dow at an all time new high?  The bulls around the world are feeling like they have just been admitted to the top of the world party.  The Dow stands a full 4 points, maybe a little more than that, above its previous high set more than six years ago back in 2000.

We here at the Update don’t think this is such a big milestone but it does represent a major nonconfirmation in the other indexes.  As long as the Dow was able to stay below its previous high the market could pretend that it had time to catch up to the Dow.  The Dow is a popular index, followed by the world, so we have no doubt there are celebratory feelings in the hearts of the bulls.  

Tuesday’s rally in the market started from a weak opening (seems like a pattern) and the Dow led the market the whole day from that point.  For a while it looked like the Dow was going to put in a powerful up day but late in the day the Dow could barely manage to hold the New High that it made during the morning.  The Dow traded up around 90 points, bouncing back and forth from up 60 to up 90, before closing up about 57 points.

The SP 500 failed to best its highs from last week.  The NASDAQ indexes fell short, too.  In fact, the Russell 2000 didn’t even get close to last week’s highs.  The SOX index seems to have vanished so we will mention the other semiconductor index the SMH, a semiconductor Holder, which fell on Tuesday.  This index noticed a preannouncement from MRVL, Marvell Technology, that caused MRVL to drop 12% on the day.  MRVL is a fairly small company but today’s news made it 12% smaller.

The commodities had some dislocations today with oil dropping 4% to under $59 a barrel.  The precious metals followed suit with silver dropping 5% and gold nearly 4%.  These are big numbers and do show some weakness in this arena.  The HUI, our mining stock index, was down 20 points to 282 and we are paying attention for a good opportunity here.  We need to be patient.

Dow Industrials:  11,727.34  +56.99
VIX: 12.24
QQQQ:  40.31
RYVNX:   20.08
RYAIX:  23.28
RYCWX:  39.40
TLT:  89.18
BEGBX:  13.72

Monday, October 02, 2006

A No News Drop is Bearish

The stock market didn’t know what to make of the news bites that presented themselves on Monday.  Construction spending was up with consensus being for a flat month over month number.  Pending home sales were up and the ISM Manufacturing Index fell more than expected although it was above the 50 reading that indicates growth.

Instead of focusing on the difficulty of the news, the market went about the business of “making a new high in the Dow”.  When the 11,722 level seemed to hold back the buying, not to mention that the highs were below those of last Friday, the market did an interesting thing, it fell and actually fairly hard and fast given what we have seen of late.  The Dow dropped about 60 points in the space of about 15 minutes while the NASDAQ Comp fell about 15 points in the same timeframe.

When questioned about the drop, several analysts said there was no fundamental reason for the sudden drop, no news item that presented itself to cause such a drop.  This is the difficulty of the bear, the reason people sell doesn’t have to be rational, just like the buying doesn’t have to be rational either.  We think the drop today is just an extension of the drop that started last Friday and has a ways to go.  The bulls will probably want another opportunity to “make a new high in the Dow” and that may still happen but we still don’t think that it would really matter to the technical bearish case.

Right now, the market is confused and wants to understand why that new high in the Dow doesn’t seem attainable.  Maybe they are taking it down to give it another go before we get to Friday and the jobs’ report.  We do not think the market needs to wait until then to decide what to do but it certainly has taken its time so far so we expect anything over the near term.

Drops with no news are particularly bearish and we are keenly aware of the break we saw on Monday.  These breaks by themselves are not much to think about but if they are followed by some more selling without cause, then we would start to feel the timing of a down move approaching faster.  As we have indicated for a while now, you do not want to be long when this thing hits.  There will be little time to react.

Dow Industrials:  11,670.35  -8.72  (wow)
VIX: 12.57
QQQQ:  40.14
RYVNX:   20.26
RYAIX:  23.38
RYCWX:  39.78
TLT:  89.30
BEGBX:  13.75

Sunday, October 01, 2006

Go Twins!!!

The past several weeks have damaged our portfolio but not our spirit.  The stock market is struggling for gains as shown by some of our momentum indicators.  The month of September was evidently not when the market started its epic decline so we are now looking to October for that start.  The market seems so strong to most observers but we just don’t see the technical strength that should be accompanying this September advance.  Instead we see weak rallies; yes, there have been rallies but they just haven’t sparked a big push to new highs.  

The SP 500 break of the May high was disappointing but does not damage the bearish case much.  If the Dow were to break the all time closing high, that would not really mean very much either in the overall picture.  The main reason for the little impact would be the total lack of support in the broader indexes (with the exception of RUT which led this advance for four years and now is struggling).  The NASDAQ indexes are well below the highs of this year and significantly below the 2000 highs.  

As we get going on the new quarter, we look ahead to the possibility of the market dropping and we want to say that the market will lead the news.  What we have been seeing so far is the complete lack of attention the market is giving to the events of the world.  When the market starts dropping, there will be any number of potential news stories to “justify” the decline.  

With the elections in an off presidential cycle, normally there isn’t much at stake.  This year, there is plenty at stake and the various players are starting to position themselves for the presidential election two years off.  We only bring this up as it relates to the market.  We think there is some interest in the market going up into the elections.  In order to get the market to do that, there must be sufficient liquidity to drive into the market.  We don’t think there is much chance the market can hold up to the election but you never know.

There are a few items of interest this week; the biggest of these is the jobs report out on Friday.  We thought the market had a good chance to top last Wednesday but the Dow peaked again on Friday last week.  The rest of the indexes seemed to find a ceiling from Wednesday through Friday.  We think the jobs report could be another target from which to high dive, but we still think last week’s strength on the back of end of quarter window dressing (mutual funds and others trying to make their reporting look good at the end of the quarter) will be undone during the early part of the week with a possible failing rally going into Friday’s jobs’ report.

Just a quick note on gold and the mining stocks:  Last Monday’s low in the HUI around 285 will probably be challenged again in the coming days.  We believe the test will Not hold and we will see even lower prices.  This is the reason for our reticence on the sector recently.  We do keep our eye on this sector because we think it holds the greatest potential to be long in the coming years.  We would just like to get good prices for it.  

Dow Industrials:  11,679.07  -39.38
VIX: 11.98
QQQQ:  40.65
RYVNX:   19.74
RYAIX:  23.08
RYCWX:  39.71
TLT:  89.39
BEGBX:  13.68