Thursday, November 30, 2006

Would You Buy Home Builders Now?

Here we are at the turn of another page on the calendar, this time it’s to December.  Would you care to venture a guess as to how much the Dow went up in November?  Would you believe it if we said it was 140 points?  Granted the NASDAQ has outperformed the Dow but not by that much.  As a percentage the Dow was up 1.2% while the NASDAQ Comp was up 2.7%.

Right, these numbers are pretty good for a month but this is a month that saw five brand new all time highs in the Dow.  The momentum has cleared ebbed the last month and we think it is possible that the last high in the Dow has been seen.  Of course, even if the Dow goes to another record high in the coming weeks, we don’t think that it will be a significant event for the broader market.

We were a little disappointed this afternoon as the market traded above our Fibonacci levels that we mentioned in our last post but in the last half hour the market dropped quickly and closed slightly down on the day.  In the last half hour, the Dow dropped over 50 points, much to our amazement.  In our evening reads, we noticed that some large brokerage firms have fiscal years that end on November 30th.  Their desire to keep some of the prices up on the week could explain some of the rallying the last few days and some of the heavy trading volume on Thursday.  It can’t explain the sudden drop at the end of the day.  

Let’s get to the news of the day which we thought was a little surprising.  We don’t generally talk about the weekly jobless claims figure which is announced on Thursday mornings.  This morning’s number is noteworthy as last week was Thanksgiving which eliminates a day when claims can be made but these numbers are adjusted; but, even with expectations of a drop of about five thousand, the actual number was up 34 thousand to a total of 357,000.  

Next, we saw that the Chicago purchasing managers’ index fell below 50 which indicates contraction.  The number was 49.9 which isn’t much below 50 but expectations were for an increase to 54.8%.  Friday brings the ISM manufacturing business index which is a national number so we’ll see how that compares.  That is expected to go up a little from 51.2 to 52 but with the Chicago area number down, it is possible to see the national figure drop, too.

Just in time for Christmas, we saw that an analyst at Banc of America raised his rating on the industry from cautious to neutral and raised his rating for several home builders from an out and out sell to a neutral.  Well, you can imagine what that did to those stocks.  The stocks have been hard hit over the past year but to us that is not a good reason to buy them.  The analyst did say that inventories are a “wild card” with seasonal increases in inventories in the spring could lead to further pressure on prices and additional cancellations.”  Please note, we do not feel the same way.  These stocks could have a long ways to go down.

Then there was the story about Kirk Kerkorian selling his stake in GM.  Maybe he thought he had made enough money.  This can’t be good for the price of that stock.

The US dollar, our last item, was under pressure again on Thursday.  What can we say about this situation?  This week the Chairman of the Fed, Bernanke, stated that the Fed was considering raising rates—did we mention that this was to prop up the dollar, which it did for one day.  Henry Paulson, Treasury Secretary, has been making statements this week that we need a strong dollar.  The WSJ is reporting that now the secretary needs to engineer a gradual descent for the dollar so it won’t hurt the economy.  The possible further weakening of the currency could be a way to reduce the continually expanding trade deficit.  

Do you feel bullish?  That’s a dangerous thing.  Be Careful.  Sell any rally.  We remain bearish against last week’s highs.  Any move that goes above the last week’s highs must be respected.  How many times that can happen is a good question?  What we do know is that at some point, there will be a final high.

Dow Industrials:  12,221.93  -4.80
VIX: 10.91
QQQQ:  44.04
RYVNX:   17.05
RYAIX:  21.53
RYCWX:  36.64
TLT:  91.53
BEGBX:  14.33 (52 week high, dollar down again)

Wednesday, November 29, 2006

Perfect Rally

Before the market opened on Wednesday, we found out that the new revised GDP number was a little better than the first preliminary one we saw a few weeks back. The number improved from an initial reading of 1.6% to the latest 2.2%.

Predictably the stock market was doing its Happy Feet dance but we’re not really sure if it was due to the upward revision of the GDP. The reason we’re not sure is that the bond market was up on the opening too. That was the high for the bond market as it drifted lower all day (interest rates move up when bonds go down).

The Dow was up about 40 points at the bell and 90 minutes into the session it jumped up to about 90 points higher. From there we saw some flat to down trading going into the afternoon. The drop was more dramatic over in the NASDAQ indexes as the Comp almost got back to even after being up over 20 points early. The NDX actually dropped into negative territory. From there the market rallied into the close with the Dow up about 90 points on the day.

The other interesting news of the day was the new home sales and the Fed’s beige book, a sort of report card for the economy. New home sales were down slightly but the median price turned up for a change of pace. We think the report should not be construed as a positive sign for housing because there are many ways to keep the prices up like paying for upgrades but there is no up tick in the number of buyers.

Taking from the WSJ, the beige book indicated “US economic growth was mostly moderate in the early part of the fourth quarter, as consumer spending grew and labor markets remained tight despite further cooling of the housing market.” There it is, the economy is ok even though housing is cooling. So there is no reason to worry.

In our last post we mentioned that we thought the market would rally on Wednesday and we thought you might like to know why. Part of it was just the time of the month. Here we are with one trading day left this month and there just needed to be a rally. The other reason is that the market was looking to “correct” the decline experienced on Friday and Monday which brings us to…

Just a little tech talk this evening because we like to see Fibonacci relationships and sometimes they need to be pointed out to you. As we looked at the price drop we saw from last Friday to Tuesday’s open we thought it would be interesting to calculate the normal Fibonacci retracement level. Without going into a lot of detail, the prediction was for the NASDAQ Comp to return to 2438.50 and Wednesday’s high was 2436.61, pretty close so far. For the Dow, the calculation yields 12,251 (we rounded up because we thought you wouldn’t believe such a round number) and Wednesday’s high was 12,240, again quite close.

Dow Industrials: 12,226.73 +90.28
VIX: 10.83
QQQQ: 44.07
RYVNX: 17.02
RYAIX: 21.51
RYCWX: 36.61
TLT: 90.93
BEGBX: 14.20

Tuesday, November 28, 2006

Big News Day, Slow Market Day

As we indicated in our last post, the news doesn’t matter so much as the market’s reaction to it.  On Tuesday, durable goods were reported Down 8.3% with existing home sales up slightly but prices recorded a record year-over-year drop and inventories were up to a 7.4 months’ supply, and consumer confidence was down after expectations for a small rise.  Durable goods orders were down the most since 2000 and “core” orders of capital goods fell for the first time in six months.  Orders for computers and related products were down a strong 25%.

As far as the housing numbers are concerned, we read the news that the national median home price was down 3.5% from a year ago.  The report said that this is the largest year-over-year drop since records have been kept (1968) and the guess was that it was the largest drop since WW II.  The realtors’ association (National Association of Realtors) said that last month was the first increase in sales in eight months and that sellers were starting to cut prices which, combined with low mortgage rate, was helping to spur sales.

Most analysts were scratching their heads on the consumer confidence figure because the job market is “so good” and the market has been rising.  The best article was from the AP quoting Gary Thayer, chief economist at A.G. Edwards & Sons, Inc.  He said consumers “are not feeling really good now…We are still positive on the consumer sector.  I think it will be a good holiday season.”  Isn’t it amazing?

Meanwhile, the stock market is meandering all day, crude oil is moving up, bond market is moving up (rates are going down) and the dollar continues to slide.  We think the picture is getting clearer for the stock market but there could come some significant clarity if the dollar weakens much more.  The Euro has been steadily advancing on the dollar and interest rates are still moving up in Europe.  Enter Bernanke…

The eminent central banker gave a message to the world today that he thinks the Fed may actually have to raise rates.  When the Fed decided to pause, it was trying to decide whether they had taken rates high enough or whether they needed to be edged higher.  (Sarcasm coming, just thought we’d prepare you.)  The Fed chairman would have us believe he and his band of bankers are going to be tough on inflation.  You don’t think his hawkish comments were meant to curb the dollar’s decline, do you?  We didn’t think so.  Please.  

We have said it before and we will say it again, the Fed is impotent right now.  They have left the party when they said they were going to pause.  Their idle talk is just that and in order to gain some credibility with the world’s markets both currency and stocks, they Have to raise rates.  We both know, and so do the markets, that they Can Not do that.  

The stock market did not give us much information on Tuesday but we expect more on Wednesday.  We would guess that the market would like to try another rally on Wednesday just to show it can but we don’t like its staying power.  

Dow Industrials:  12,136.45  +14.74
VIX: 11.62  (falls hard on a quiet day)
QQQQ:  43.77
RYVNX:   17.26
RYAIX:  21.66
RYCWX:  37.17
TLT:  91.15
BEGBX:  14.26 (dollar still falling)

Monday, November 27, 2006

Are You Feelin' Lucky?

After the weekend, the market had a rough go of it at the bell but then got off to its normal rally mode…Wait a minute, that’s not right.  Over the last several months, the market has been able to shrug off many little early morning drops but not Monday.  On Monday, the market made a steady down hill for most of the morning with the Dow being down about 150 around lunch time.  From there the market found a trading range and closed near its noon lunch time lows.

You may have heard the news of “why” the market was down on Monday but I think the scary thing is that there really was no hard news for a drop like this.  For us here at the Update, this is the way a turn down should look.  It should get started modestly like last Friday after Thanksgiving and then drop hard for a day without any serious selling news.  

Yes, the analysts were quick to point out that the dollar has been in a low volume drop over the past several trading days, Wal-Mart indicated a poor November including Black Friday (WMT was down 2.7% on Monday), and oil traded back above $60 a barrel.  Analysts also said the drop “wasn’t surprising” due to the Dow’s near 15% run up since the beginning of the year.  There was bullishness in some of their statements as they thought it possible that the dip would be temporary because of traders wanting to buy some stocks to “boost” their portfolios.

Well, the market does not really pay much attention to those of us who are making statements about it.  It does whatever it wants to and we need to respect that.  The past several months have been some of the most head scratching trading months ever.  The bulls are just smiling every single day with no worries.  Every time the market goes down just a smidgen, the buyers come back in and bid it up again…but not Monday.  

The question of whether or not the market will continue down is now sitting out there for everyone in the world to wonder about.  All of a sudden the market has a chance to drop and drop hard, right here and right now.  The market can do whatever it wants to but we believe that the market needs to go down, maybe not on Tuesday and maybe not this week but Sometime soon.  

OK, what is going on?  We must now focus on what the market is doing.  The news is only going to distort the picture the market is trying to paint.  The main point will be how the market reacts to the various pieces of news.  On Tuesday we get to see durable goods and existing home sales for October.  There are some retail sales figures coming out and the November Conference Board consumer confidence report.  We would now say that we should ignore the numbers for the most part and watch the market.  We of course think the home sales are important for the long term but even those are not as important right now as how the market trades.

Most players should be “expecting” a rally on Tuesday so if one develops we should pay special attention to its strength.  If one doesn’t develop and selling continues, there could be a very bad week on tap for the market.  We believe that the current stock holders have some of the weakest hands for holding stocks.  The minute the market looks like it wants to go down, there will be a dearth of buyers and sellers will swamp the market.  Greed will turn to Fear very quickly.  This event could have started on Monday, well, even last Friday.  

Now, we know that we could be getting ahead of ourselves a bit but you can never be sure what is going to happen.  The market is on a precarious peak and when it goes over the edge, there could/will be a major drop.  The question is “Are you feelin’ lucky?”  That’s the best Clint Eastwood line we could come up with on short notice.  Seriously, the question is whether the market is going to continue going down right now or not.  Do you want to keep your money on the table or in the bank?

Dow Industrials:  12,121.71  -158.46
VIX: 12.30 (15% jump)
QQQQ:  43.66
RYVNX:   17.35
RYAIX:  21.72
RYCWX:  37.25
TLT:  90.95
BEGBX:  14.18

Sunday, November 26, 2006

Black Friday Requires a New Name

After a nice long weekend, we are now ready to begin another week of waiting for the stock market to decline. There are several economic reports due out this week and we will take a look at them as the week progresses. The big ones are durable goods, existing and new home sales, and GDP preliminary report. The jobs report isn’t due until next week Friday due to the first falling on Friday.

As for a review of last week’s action, there really isn’t much to say. As reported in our last post, DELL announced their delayed earnings and the stock managed to pop about 10% and gave a lift to the NASDAQ indexes on Wednesday. The news wasn’t particularly bullish in our view but the stock went up anyway. This stock has been one that has participated in the rally the last several months—again, we’re not sure that the outlook for DELL is all that positive. That said, someone thinks it is worth 40% more than it was in the summer?

We expect much chatter about the Black Friday results over the next few days. The analysts will try to put a bullish spin on the numbers as we go into the Christmas buying season. As we see it, the retailers put on huge discounts to get people into their stores. Black Friday needs to be renamed because it used to be the day the retailers were able to get into the Black for the year. We figure margins were barely positive for the weekend and very negative for Black Friday Morning. The consumer is there if you sell something about 25% under cost.

That reminds us of the local paper we saw today. On the front page there were two articles. On the left was a picture of a couple sitting in front of their 96 inch screen watching a TV show they had recorded. On the right was an article about how foreclosures had increased. Exotic mortgages were to blame in the article, the author saying that people had gotten into them without really knowing what they were. We wonder how many of them had bought large screen TV’s on the same type of notion.

The bulls are very complacent about the current run up in the stock market but we do wonder if their days are numbered. We will be watching and waiting. Let’s see how the week gets started, shall we?

Dow Industrials: 12,280.17 -46.78
VIX: 10.73 (5% jump)
QQQQ: 44.65
RYVNX: 16.60
RYAIX: 21.24
RYCWX: 36.30
TLT: 90.62
BEGBX: 14.16 (new 52 week hi with dollar falling)

Tuesday, November 21, 2006

DELL Reports

As we look at the market this evening, we see a whole lot of bullishness and very little price movement to justify the bullishness. Yes, the indexes are at relative new highs and the Dow itself is near a record high. Still, with all of the optimism out there, prices are very well contained. Looking at the NDX, the NASDAQ 100, for the last five days, it has traded in a 20 point range. This is not the type of “breakout” move you would expect for an index that has just made multiyear highs.

We suggest that the advance is definitely “long in the tooth”. (What does that mean???) The market wants to stop going up but it has followed a very narrow channel on the way up from the lows of this past summer. This means there has been no room for the bulls to catch their collective breath. We think that the market will just have to hiccup and the bulls will scramble to the safety of cash.

Tuesday’s trading was very narrow and on pretty light pre-holiday trading. The Dow was up a magnificent 5 points. But then the market closed…

That’s when DELL announced their delayed earnings. While saying the earnings were preliminary, because of government and internal investigations into its accounting, DELL said that earnings were higher than expected in its third quarter. The stock enjoyed some very intense buying after the announcement pushing the stock up over $2. What is going on here? The stock should be something that scares people but it has decided not to go down during this period.

We expect very light trading over the next two days, Wednesday and Friday. The Friday after Thanksgiving has had some very big down days, usually on light volume, and this Friday could deliver one of those types of days. We will wait and see what happens due to the shortened holiday trading.

With that in mind, the Update will not publish another post until Sunday evening.

We wish all of you a delicious Thanksgiving. This is our favorite weekend of the year so we will be enjoying it. There are many things to be thankful for. One thing for us is your continued interest in the Update. See you back here again next week.

Dow Industrials: 12,321.59 +5.05
VIX: 9.90 (single digits again)
QQQQ: 44.45
RYVNX: 16.80
RYAIX: 21.29
RYCWX: 36.01
TLT: 90.31
BEGBX: 13.90

Monday, November 20, 2006

Economists Predict...

The online WSJ (Wall Street Journal) had two articles side by side on Monday. The first was an article describing the housing situation in several markets around the county. The chart had two statistics on it, one, the percentage of homes that have reduced prices, about 40%, and, two, the change in the number of homes listed, about even or a little down. The other article was a report summarizing economists’ views on housing. The article said that by a two to one margin economists think that the worst of the housing bust is over. They cited the fact that the number of homes going on the market has slowed and that has to signal a turn around.

We here at the Update would caution these so-called experts that the true mark of a turn around is when the buyers return and not before. Just because sellers have given up on trying to sell their houses does not mean there is an increase in buyers. The speculators in real estate have basically vanished into thin air. They had accounted for as much as 40% of sales in the last few years. And, where were these experts a year ago when the housing market turned down?

In the news on Monday, the LEI, leading economic indicators, were up as expected and as we expected, it had very little influence on the trading day. This is an ongoing situation as the market seems to continue to grind higher day after day.

We recommend that you take a look at volume and you will see that there isn’t enough volume to really keep this market going. We have seen small upward price moves but very little volume to back up these moves. That’s why you don’t see very strong days, just a steady grind higher on most days.

Our momentum indicator seems to have topped and is now moving down. This has happened before in the last few months as the market seemed to get a little overbought and needed to correct a little. This time, the market is correcting a little and we will see if it will finally roll over. There is a good window here where the market has a chance to go down. You may think that the market can’t go down because it hasn’t for a few months but, just as it has been going up recently, it can go down easily. It is overbought and needs a break.

Look at the VIX below, it has now gone into single digits. Complacency rules—and that is very bearish.

Be Careful out there, real careful.

Dow Industrials: 12,316.54 -26.02
VIX: 9.97 (single digits)
QQQQ: 44.39
RYVNX: 16.78
RYAIX: 21.35
RYCWX: 36.04
TLT: 90.09
BEGBX: 13.87

Sunday, November 19, 2006

Housing Starts Collapse

Last Friday, seems like a long time ago, the market experienced options expiration for November and before the market opened we saw a very poor housing number.  October starts were down about 15% last month to a six year low, expectations were for about a 5% drop.  Here at the Update, we were not surprised by the number because after all it is the central tenet in our theory that the stock market will drop due to the housing market.  Still, with the housing dropping over the past year, the stock market has kept going up for whatever reason.  The fundamentals are still in place to hurt the stock market.

Anyway, the stock market did open down a bit on the news but did not seem to feel compelled to stay down.  The Dow put in its low within about 15 minutes and then ground higher all day to close out at another new record high.  The NASDAQ didn’t come out of negative territory but managed to close mostly even on the day.  The bond market had a good day but failed to best its Tuesday high.  Bonds have been the one bright spot in our portfolio the last few months but they have not been able to contain our losses in the stock market.  

We will see how this plays out over the next week as we go into the holiday season with Thanksgiving this week.  Black Friday should be given some attention by the market but the market doesn’t seem to be concerned with any kind of news, good or bad.  Speaking of news, the leading economic indicators will be announced on Monday and they will be ignored, too.

As we look out over the world markets this evening, the Asian market stands out.  The Japanese market is down over 250 points (1.5%) and the Hong Kong market is down about a half a percent.  In Australia, their market is down about 1.5%.  Our overnight futures are down a little but not much.

The market needs to show its hand again but we think it’s going to be a slow week.  That doesn’t mean it will and we plan to be here to analyze what is going on.

Dow Industrials:  12,342.56  +36.74
VIX: 10.05 (major complacency)
QQQQ:  44.30
RYVNX:   16.83
RYAIX:  21.38
RYCWX:  35.88
TLT:  89.95
BEGBX:  13.86

Thursday, November 16, 2006

Another Day Another Record Dow

On Thursday morning, we found out that the CPI was almost a distant memory being down another half a percent matching the last month’s decline. The media has now started to focus on the full CPI because it is now showing better decreases than the “core” CPI and that is more appealing to the public. With that in mind before the market opened, stocks were sought after and so were bonds. The bonds didn’t hold their gains but the stock market ground higher all day. As an added benefit oil was down over $2.

Ten days ago the NDX traded below 1700 and Thursday it closed above 1800. That’s a pretty good run for a tired bull, about 5%. One of these days the market will need to slow its upward pace. Friday is options expiration and with it we hope there will be some natural slowing in the bullishness.

Afte the market closed, HPQ (Hewlett Packard) showed some strong earnings. This is in sharp contrast to DELL's announcement on Wednesday evening when it said it would delay its earnings announcement until later in the month. Still, the overnight market is not celebrating the HPQ news. We will see how options expiration Friday trades.

There is an article out on CNN Money (check the link to that site at the left) that mentions the “fear gauge” or the VIX as we talk about it here at the Update. The article says that it’s at one of its lowest points in a decade but of course goes on to explain that this is not a problem. We see complacency as a large problem but so far this month, or since late July, the bulls have been cleaning up and we have been gasping for breathe.

We still have some dry powder and we have had much of our assets in bonds or cash equivalents and have been earning a fairly decent 5% return or so on it. We are anxious to cash that in and go short with at least some of it but we are going to wait until the market decides it wants to go down.

We do think that it’s at these times that those of you who own blue chip type stocks, this is represents a good time to sell, again. We just know that you probably think there is no reason to sell since they are just going up every day, but here’s what happens: You will watch them go up and then you will watch them go down and you will say I can’t sell now, they have come down too far. If they go back up again I’ll then sell and they never do.

As we survey the technical landscape, we still see volume lighter than it should be, an overbought momentum indicator, relatively weak price moves on the way up, just to mention a few.

Just, please be careful. That’s the best we can say this evening. Have a good weekend.

Dow Industrials: 12,305.82 +54.11
VIX: 10.16 (new 52 week low)
QQQQ: 44.30 (new 52 week high)
RYVNX: 16.79
RYAIX: 21.35
RYCWX: 36.06
TLT: 89.44
BEGBX: 13.81

Wednesday, November 15, 2006

DELL Delays Earnings

Wednesday’s trading was pretty much a follow up to Tuesday’s rally just a little more subdued. The only fly in the ointment on Wednesday was the Fed’s minutes which indicated that the economy could still be plagued by inflation. They are watching the weak housing market to see if it slows economic growth. With that news the market slowed down its advance and pulled back slightly into the close.

Then after the market closed, DELL announced that it was going to delay its earnings report until nearer the end of the month. The original date was supposed to be Thursday (today for you). Although DELL did say that the SEC stepped up an investigation into the company’s accounting, DELL said that wasn’t the reason for the delay in reporting. DELL announced that it wouldn’t be having a conference call on earnings either. So, what’s an investor to do? Well, in after hours the stock was hit for 3 Whole %. Wow, what a blow!!! In an uncertain world, DELL should be down 30% on this kind of news.

The market seems to be powering through any and all bad news. We expect that the reason is that temporarily the feeling can be that the Fed won’t have to raise rates. (Maybe last week’s election is playing into the thought process, too, although we don’t really know why.) That Fed thing is getting to be a tired reason for a rally but that is in a nutshell what we think the market is doing. When the realities of the economy start showing up at home, the stock market should have dropped. Can you follow the tense there?

What we mean is that the market seems so blind to the future according to our view. We think the market should be looking into the future to see what is going on. This current rally is certainly not lining up with our vision for the future so there are a couple of things: First, the market is definitely smarter than we are, which normally is true. In the current arena, we just don’t think so. Second, we could be right and the market is wrong, which if that is the case a day of reckoning is coming. Of course, that is our current position. Every day we have another little rally, the pain is still there.

The latest read on our momentum indicators based on Wednesday’s trading is that the market is again overbought and has not been oversold for nearly four months. That’s a long time and we don’t think it can keep this up much longer.

Dow Industrials: 12,251.71 +33.70
VIX: 10.31
QQQQ: 44.11
RYVNX: 16.94
RYAIX: 21.44
RYCWX: 36.37
TLT: 89.85
BEGBX: 13.84

Tuesday, November 14, 2006

Another Record Dow

With very little time this evening, we thought we’d just recap some highlights. First, the October PPI seemed a bit odd with a drop of 1.6% with expectations running for only a 0.6% drop. The “core” PPI fell also, down 0.9% with expectations for a rise of 0.1%. The reason cited was the drop in the price of energy. Thank you very much. When prices of energy were going up, it didn’t seem to be reflected in the PPI but now that it’s going down, it is. Where are the referees???

Energy was cited as the reason for the drop in retail sales, too. With all of this Deflation going on how did the markets do? Well, the bond market did like it and traded to a new intermediate high but it wasn’t really too convincing. The stock market thought it was ok early but fell such that mid-morning, the Dow was down about 45 points. From there, it was up and away.

In the afternoon, one of the hawkish Fed members, Poole, stated that the housing market seemed to have further to go on the downside. This was taken to mean He was no longer hawkish on interest rates and neither was the Fed. From there the stocks jumped and the Dow closed up about 85 points.

Well, what can we say? All four of our indexes traded to new highs for at least a year or more on Tuesday. This would indicate that there are very few sellers around. We will provide more information in our next post.

Dow Industrials: 12,218.01 +86.13
VIX: 10.50
QQQQ: 43.93
RYVNX: 17.06
RYAIX: 21.52
RYCWX: 36.58
TLT: 90.19
BEGBX: 13.88

Monday, November 13, 2006

Just Another Manic Monday

The NASDAQ sprinted to a new high in early trading today taking the NASDAQ 100 with it. There has been buying in all things tech, for those of you who know the term beta, this is called beta chasing. For those of you that don’t know, beta is the name given to describe how stocks move with the market. High beta stocks move more than the market while low beta stocks move less than the market and negative beta stocks move opposite the market.

We note that Monday’s volume was again on the light side. With all these new “highs” going on without volume, the bulls should be a little concerned but they seem not to have a care in the world. They seem to think the market has made it past all of the bad news concerning the economy, especially the housing market. The problem is that people have tightened their collective belt and will now start needing to pay down some of the credit they have strapped themselves with.

In the news for Tuesday is the PPI report which shows an expectation for another good sized drop of 0.6% with a “core” rate increase of 0.1%. These numbers compare to last month’s drop of 1.3% in the full number with an increase in the core rate of 0.6%.

The other Tuesday number is the retail sales. We don’t want to talk about expectations here because they could be off the mark. With Christmas sales right around the corner, there should be some concentration on these numbers. We expect some market reaction to them.

As is the case more and more, Tuesday will be a busy day and watching the market much at all will be difficult task. With that in mind we will be relying on our normal reads to tell us what’s going on during the day. Please leave a message in the comment section if you see anything unusual happening. Thanks.

Note: As a reminder the True Contrarian, at one of the links on the left, has put up a new post describing the course of the economy and gold over the next year or so. It's worth a quick read if you haven't read it already.

Dow Industrials: 12,131.88 +23.45
VIX: 10.87
QQQQ: 43.46 (new 52 wk closing high—highest in 5 years)
RYVNX: 17.44
RYAIX: 21.75
RYCWX: 37.10
TLT: 89.84
BEGBX: 13.85

Sunday, November 12, 2006

Market is Trying to Made a Top

The stock market managed a bounce out of the minor Friday sell off.  There is precious little to report this evening on the state of the market even though the next week does have some significant items such as the inflation data in the form of the CPI and PPI as well as housing starts on Friday.  

In the wake of the election the market doesn’t seem to have much to trade on, or maybe we should say that the media doesn’t know what to say.  What does the market have to say?  

As we look at the last 2-3 weeks and compare the highs on October 26th with the highs on November 8th, we see some subtle weakness in the technicals over that same period.  The first thing to notice is that the SP 500 did not make a new high along side the INDU and the NASDAQ Comp on November 8th.  

Our momentum indicators suggest the momentum high happened back on the October 26th with the price high happening on November 8th.  Obviously, the market (Dow) reserves the right to make another new high but we look at last Wednesday as being a key point.  

The biggest indicator is volume, in our opinion.  Looking at volume, it has sort of dried up on this late run to new highs.  Again, subtle weakness has appeared on this last high with the 5 day average upside volume lower than it was at the earlier high.  

We do like to see how the 5 day average new highs for the NYSE confirm the new highs and they peaked back on October 27th at 314 with the high last week being 241 which occurred on Friday, two days after the new Dow high.  

By themselves they don’t build a case to say we’re going down but collectively there is a stronger signal.  We are going to keep an eye on the market every day to see if something significant happens with regard to price.  Until then, we must wait.

Dow Industrials:  12,108.43  +5.13
VIX: 10.79
QQQQ:  43.03
RYVNX:   17.78
RYAIX:  21.96
RYCWX:  37.30
TLT:  89.86
BEGBX:  13.91

Thursday, November 09, 2006

CSCO Can't Hold Market Up

Thursday’s big items were the CSCO news from Wednesday evening, the trade deficit reduction, the final democrat senator wins to push the democrats into the majority in both houses, the jump in the precious metals, and the market’s response to all of the news. CSCO screamed out of the blocks in early trading and opened on the High of the day at 27.44, a new 52 week high, in fact the highest price for that stock since early 2004. From there the stock drifted lower most of the day and closed near its lows of the session, still up at a new high for the year.

The reduction in the trade deficit didn’t do too much to the stock market or the bond market. The news is just so bad on that front that people have been ignoring if for a long time. Later in the day the precious metals jumped maybe in response to the trade deficit news but maybe not. Gold was up 3% and silver was up 4% with the HUI up about 4%. The precious metals market was joined by crude oil which spiked a couple of percent. Do you think the markets are starting to try to figure out what the election means?

We think the stock market was fairly loud and clear today as the early morning jump spurred by CSCO could not hold. The market, at least the tech heavy NASDAQ, started out about 0.75% higher, spent the rest of the day leaking, this on the highest NYSE volume since October 4th. We know that the market has been known to thrown us bears a bone or two now and then and immediately come take it away but we have a lot of hope built into the market at this time and a nice drop from these crazy highs would be good. We think the bulls would benefit from a healthy correction, too, or so we would tell them. They would say that a 73 point down day in the Dow is all the correction necessary. What would you say?

Here it is again, Thursday evening and we have watched another week of action go past us. We can only wait for an opportunity that we like. Have a good weekend.

Dow Industrials: 12,103.30 -73.24
VIX: 11.01
QQQQ: 42.80
RYVNX: 17.99
RYAIX: 22.08
RYCWX: 37.29
TLT: 89.47
BEGBX: 13.86

Wednesday, November 08, 2006

CSCO Gives Added Push

The biggest anticipated item this evening is the stock market’s reaction to the election. We’re not sure the market made any definitive statement about that on Tuesday. That could be because there were still some open questions as to whether the democrats would take both houses or just one.

While we knew the republicans couldn’t roll over and concede defeat, we didn’t expect the giant change in the secretary of defense as their answer to the election news. Having Rumsfeld “resign” and announcing his successor the day after the election seems like an attention grabbing move to take the spotlight off the election negatives. CNN put it that “The announcement came after exit polls from Tuesday’s election showed that nearly 60% of voters were unhappy with happenings in Iraq.” In any event the stock market seemed to be trying to pay attention to too many things.

The news out of one of the home builders, Hovnanian, was not that great and kept that group from participating in the little up move in the stock market. All of these builders seem to have been rallying with the market since the July lows. Now, in the last three weeks, they look like they’re about to drop again. Maybe people are starting to get the sense that housing is not coming back like they thought it might a few months ago.

Hovnanian’s (HOV) said "Our financial results for the fourth quarter continued to be negatively impacted by high cancellation rates and increased use of concessions and incentives, particularly on the resale of those homes which experienced contract cancellations." The company said that it is walking away from deposits on some land options saying that “Although it is painful to incur these non-cash charges, we believe it is much better than proceeding to build out these communities at very low returns or losses over the coming years.”

Toll Brothers (TOL), another home builder, reported on Tuesday evening that it too was experiencing some higher than normal cancellations. In the quarter that ended on October 31st, cancellations amounted to 37% of the contracts signed in that quarter compared with 18% in the third quarter. Back in August the company said it would be delivering 7,000 to 8,000 houses in fiscal 2007 (starting November 1st) but said this week that number would be closer to a range of 6,300 to 7,300.

In the “good” news department, CSCO announced their earnings this evening and the stock jumped over 7% after the news. CSCO’s John Chambers is normally a little excited about his company’s results and that was the case this evening. He told the market that his company’s profit rose 28% on a 25% increase in revenues in their first fiscal quarter. This comes after the company purchased Scientific Atlanta earlier this year. That purchase added greatly to these numbers in the quarter.

We note that the news on CSCO is generally something that the market takes to heart since it was one of the market darlings in the late 90’s. The market was very happy about the news this evening and we’ll see how strong it opens in the morning. There definitely is some strength in the overnight futures.

Dow Industrials: 12,176.54 +19.77 (new record)
VIX: 10.75
QQQQ: 43.03
RYVNX: 17.79
RYAIX: 21.96
RYCWX: 36.85
TLT: 89.53
BEGBX: 13.80

Tuesday, November 07, 2006

Election Day

The election seems to be front and center this evening as we write this.  CNN has projected that the Democrats will take the House but have said the Senate races are too close to call at this time.  Meanwhile the stock index futures are down slightly in over night trading but this does not suggest a lower start in the morning.  

We expect that Wednesday’s trading will be affected by the results to some degree and we are not in any position to make a call for the trading.  What we can say relates strictly to Tuesday’s trading and that was a bit of surprise as the market opened fairly calmly but rocketed up shortly after the open.  The midday trading followed a flat line pattern until some of the support fell out during the afternoon.  The market still finished up quite a bit but the Dow was unable to hold record territory at the close.  

Our position continues to be that the market is dangerous right now.  We look at the rampant bullishness for the market even as prices have not moved up much above the highs set at the beginning of the year.  Certainly the headliner Dow has popped up slightly above with its record close a few weeks ago but the rest of the market has not.  These are the little disconnects that we try to remind you about once in a while.

In our next post, hopefully we can bring you something that represents clear trading in the market.  The election seems to have clouded the picture on a very short term basis.  Just remember that the market rarely trades on facts, but anticipation of possible facts.

Dow Industrials:  12,156.77  +51.22
VIX: 11.09
QQQQ:  42.83
RYVNX:   17.95
RYAIX:  22.06
RYCWX:  37.00
TLT:  89.20
BEGBX:  13.82

Monday, November 06, 2006

Election Fever is High

In our last post we mentioned that Monday is generally a strong day of the week. We didn’t really mean this strong, we were talking more of a normal little bounce of maybe 50 points to correct the six down days in a row for the Dow. So, one day’s trading managed to cover five of those six down days. We are reluctant to say that it was a big win for the bulls, even though the price move was fairly strong. The reason is that the volume was less than what would normally happen on such a big price swing.

Once again, we have been waiting for this day for a very long time—the election will be over on Tuesday. Tonight as we look at the coming trading days, we can only sit back and see what the election brings. There seems to be so much attention focused on this election. The financial media, as we mentioned in our last post, has been picking up the electricity in the stock market due to the election. They seem to think that the market will Now be able to move up much more due to the results of the election. Apparently no one has told them of the theory to “Buy the Rumor and Sell the News.”

This evening there seems to be very little to say about the market because we don’t really know how the market will react to any news and we certainly don’t know what the results of the election will be, whether the gridlock will occur or not. We will say that the market will not all of a sudden be affected by the election, that has mostly been priced in. Those that think the election will affect something in the way of price will be doing their trading too late. We recommend letting the dust settle on the election before making any big decisions on the market.

One last item, the front page of Barron's magazine has the title "Next Stop 13,000?" The subtitle says that a third of the portfolio managers they surveyed said the Dow will surpass 13,000 by mid-2007. So there you go, investment advice for the next six months seems to be buy the Dow here at 12,000. Interesting headline the weekend after the Dow dropped back into the 11,000's. We take the contrarian position (what did you expect?) and say that there are several reasons to be cautious when reading such a headline.

Dow Industrials: 12,105.55
VIX: 11.16 (no change from Friday, curious)
QQQQ: 42.54
RYVNX: 18.13
RYAIX: 22.17
RYCWX: 37.30
TLT: 88.79
BEGBX: 13.73

Sunday, November 05, 2006

Will Gridlock Be Bullish?

The Friday stock market did give us a nice reversal from the opening numbers and by noon there seemed to be a solid decline playing out.  From there, the market managed to stage the normal rally and, even though it closed down, it closed fairly strong.  With the possibility of any kind of news over the weekend, we were impressed with the staying power of the bulls going into the close.

The news seems to have switched to economic strength all of a sudden.  The strong jobs report on Friday just slammed the bond market but the stock market managed to come out of the tailspin it was in the afternoon (the market seems to deal with all this bad interest rate news in a couple of hours).  There seemed to be less talk of the Fed being able to lower rates anytime soon after that report was released.

The perception might be that since the Dow has been down on six straight days and Monday generally being a strong day of the week, the bulls just said let’s buy ‘em.  We have been patiently waiting for the market to get done with this rally that started back in July and seems like it has lasted forever.  Starting with the outside down day on Wednesday, we have started to see the technical picture switch to the bearish side.  With the way the market traded on Friday, we are now waiting to see how trading plays out during this election week.  

Normally, we don’t discuss politics here at the Update but we must discuss it a little in light of the current stock market move.  We think that the basic reason the market has moved up over the past several months is the simple fact that the Fed has been taken out of the equation; but the other reason is the hotly contested elections.  The stock market needs another reason to be bullish and for some reason this election is just the ticket.  There is reason for many to believe that the market can rally due to the possible changes in the political landscape.  

The foremost thought we have heard is the Gridlock position, that being the Democrats being able to improve their numbers in Washington enough to make it difficult for the Republicans to maintain control over partisan issues.  The bulls maintain that if Gridlock were to occur, that would be good for the stock market.  Well, we don’t have to agree or disagree with that position because what we Have seen is a big rally for the last several months anticipating something.  Now, the media is telling us what that something is, Gridlock.  The mere fact that the media has attached this meaning to the rally is one reason not to believe it, but the fact is that the market is still in overbought territory and now the election is Tuesday.  Will the Reason for the rally materialize on Tuesday and will the market react positively to it?  Let’s pay attention to what the market will say the next couple of days.

For more on this issue, the True Contrarian has described how the Gridlock will affect the dollar, that would be positively according to him, meaning gold will probably go down.  Check out his new post at the link on the left.    

Dow Industrials:  11,986.04  -32.50
VIX: 11.16
QQQQ:  41.93
RYVNX:   18.74
RYAIX:  22.54
RYCWX:  38.03
TLT:  88.42
BEGBX:  13.75

Thursday, November 02, 2006

Friday's Jobs' Report Looms Large

We could spend a few minutes telling you about the news of the day for Thursday, but that would mean we would be telling you that 3Q preliminary productivity was unchanged as opposed to the +1.0% expected or that September factory orders were up less than expected or that unit labor costs were higher than expected. There doesn’t seem to be any point to tell you all of this Bearish news because the market just isn’t interested in such things. Besides, Friday morning brings the big number we have all been waiting for, the jobs’ report.

The jobs’ report is expected to show about 125K jobs were created in October while the unemployment rate is supposed to remain level at 4.6%. This report seems to be ill timed due to the election next week and the position the market is in this week. The fact is that these are government numbers and who knows what seasonal or other adjustments are being made to torture them. We aren’t trying to say that the numbers are manipulated but there is the possibility that the report shouldn’t be, shall we say, detrimental to the election.

The stock market will do what it must do in spite of the news. The news is just there to help us get better prices for the action that we are trying to trade. In this context, we like to think that the high price of the month occurs near the jobs’ report. This theory has come under severe strain the last several months but it is not down and out. We think Friday holds the possibility of a reversal given the right circumstances.

As we see it, the market has gone through a metamorphosis (the term morphed came from this very word, imagine that) the last week or so changing from an imitation butterfly bull market back into the caterpillar bear market that it really is. Well, maybe the verdict isn’t in yet, but the picture has certainly changed.

We see that the over bought condition has abated meaning either that the market is about to surge again or that the urgent buying is now over. Time will tell and hopefully Friday morning will give us some good clues to the near term direction. If we do get numbers the market likes, we may see a nice surge at the opening bell giving a very nice opportunity in our minds to sell.

In our last post we talked about the need for the market to “fill” in those vertical moves. Well, it didn’t do that today but Friday may actually show us that fill. Or, if conditions don’t improve we could see the most natural drop in the course of early trading. We think Friday’s market is very ripe with possibilities. You may want to pay extra close attention to the action. We will be back on Sunday evening for another post covering Friday’s action. Friday should be interesting.

Dow Industrials: 12,018.54 -12.48
VIX: 11.42
QQQQ: 42.04
RYVNX: 18.60
RYAIX: 22.44
RYCWX: 37.81
TLT: 89.59
BEGBX: 13.85

Wednesday, November 01, 2006

Tech Talk

We apologize in advance for what will surely be some technical talk this evening, especially given the rich technical picture we see the market in tonight.

When the stock market moves radically in a vertical direction either up or down, there usually is a move that brings prices back into that price range.  For some reason the stock market needs to “fill” those spaces in with real trading.  Looking at the NASDAQ Comp in just the last ten days, there are three fairly strong vertical moves, one up back on Monday October 23rd, one down on Friday last week, and another down one on Wednesday (today).  The first two were quickly filled in within two trading days and the last one is just tonight sitting there.  Actually, looking at the chart there is almost the same price for the low point of the first one (on Monday, October 23rd) and Wednesday’s low point.  This is nice symmetry but we do have the issue of the vertical move, will it get “filled” or not.

Wednesday’s down move does bend the charts down a little but there wasn’t a break in the firm uptrend of the past three months.  The important issue is whether the market will now break through that up channel to show some weakness.  Wednesday’s volume was somewhat higher than Tuesday’s but not enough to get us bears excited.  

The market is currently in a position to fall dramatically to correct, at least, the three month rally.  If a break occurs in the next few days and it happens on heavy volume, we will conclude that the time for a major correction is at hand.  We have indicated that the Friday jobs’ report could give us the news impetus for a nice reversal of fortunes but the market didn’t seem to want to wait for that on Wednesday.  

The Dow made a slight move down to get a real good look at 12,000 from the topside.  We have long said that the Dow likes to hang around round numbers for a while.  They act almost like magnets or at least sticky points for prices.  Normally, price levels in indexes like the Dow don’t really mean very much but we tend to see the big round numbers as being a bit more important than others.  Certainly they capture the attention of the public, if nothing else.

We are extremely keen on the pattern the market is in tonight.  As we mentioned at the top of this post, the market normally fills in the trading of vertical moves before going any where too far away.  That is true unless the move is going to be a strong one like the one that could be building for the next few days.  We just can not say for certain this will happen because there is some likelihood that the market will go back up and fill in Wednesday’s vertical down move before it proceeds any further south.  

The news was not good out of the manufacturing area as the ISM’s index fell just slightly versus an expected rise.  The bond market enjoyed this perceived weakness and pushed to a four week high.  The ISM’s index was above 50, barely at 51.2, which indicates growth.  Construction spending was down 0.3% while pending home sales fell 1.1%.  The MBA refinancing index was lower by 4.5% but Ford and GM showed increases in sales in October.  All in all, the economic picture didn’t look as bright as the market would have liked.

Dow Industrials:  12,031.02  -49.71
VIX: 11.51
QQQQ:  42.00
RYVNX:   18.64
RYAIX:  22.47
RYCWX:  37.73
TLT:  89.96
BEGBX:  13.85