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)

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