Thursday, March 29, 2007

End of the Quarter

Market Action:
As the market opened on Thursday, the players were ready to party as stocks pushed up at the bell.  The good news???  Well, let’s see, GDP for fourth quarter was revised up from 2.2% annual growth to 2.5%.  Oh, and with it, the PCE deflator was up 1.8%.  You may recall our mentioning the deflator in previous posts.  It’s how the GDP gets inflation taken out of it, by deflating the amount by the deflator.  

We have written many times that this is a way to make the GDP look however you want it to.  OK, we aren’t saying that the GDP would be manipulated in any way…We are saying that the price deflator probably doesn’t take the full amount of inflation into account and therefore shows a larger increase in the GDP than, say, we would calculate, given the opportunity.  

The Dow shot out of the blocks and was quickly up 85 points but that was the high for the day.  After three days of downside, the Dow was ready to stretch its wings and fly a little, but it then fell out of the sky.  At one point during the day, the Dow was down about 30 points, but the NASDAQ indexes were down nearly a full percent.  From those lows, the market staged a remarkable rally to end the day with the Dow up about 48 and the NASDAQ indexes about even.  

After hours, DELL was in the news again, with bad news again.  According to the WSJ, Dell said that it had found evidence of misconduct and that it also found a number of accounting errors and deficiencies in the financial control “environment”.  DELL said the investigation was not complete and would have to delay filing its 10-K about two weeks.  DELL was down about 2.5% in after hours trading.  Just for reference, Michael Dell took over running the company day to day about two months ago…

We note that the NASDAQ indexes were considerably weaker than the Dow and the SP 500.  This is something that we thought would happen.  The large cap stocks tend not to lead going up or down.  So, as the NASDAQ starts to weaken, the large caps will be a bit of a safe haven for a short while.  

We are not recommending staying in the large caps but they are going to provide some relative shelter.  The key word there is relative so if the NASDAQ indexes drop 10%, the large caps might only drop 7%, big consolation, don’t you think?

The market is trying not to go down.  It’s almost like a toddler who is so tired they can’t keep there eyes open but they refuse to close their eyes and sleep.  We know that the end of the quarter needs to play out and we may indeed see some more upside on Friday but it’s only a matter of time.

Our Moves:
We didn’t pull the trigger early enough this morning but did manage to get a trade off before the market went down in earnest.  We purchased the QQQRS puts at a price of 1.87 and then watched them go up to 2.30.  We should have taken that nice profit but we didn’t.  Maybe Mr. Market will be nice to us on Friday and not have that end of the month rally.  Then again, probably not.

Have a good weekend and sleep well.

Dow Industrials:  12,348.78  +48.39
VIX: 15.14
HUI:  338.50
QQQQ:  43.57
QQQRR: 1.46 bid
QQQRS: 1.99 bid
QQQRT: 2.64 bid
RYVNX:   17.16
RYAIX:  21.66
RYCWX:  36.52
TLT:  88.45
BEGBX:  13.86

Wednesday, March 28, 2007

Market Trying to Go Down

Market Action:
Prior to the opening bell, February durable goods orders were announced and they were a bit weaker than was expected.  There’s that weaker theme again.  January’s number was revised downward from 8.7% to 9.3% and February’s number came in at up 2.5% with an expectation of 3.5%.  Looking very specifically at the orders excluding transportation equipment, which is a common exclusion, orders were down 0.1%, which was the fourth down month in five months.

The denied incident in the Gulf on Tuesday evening did weigh on the overnight futures and, with the additional tug of the durable goods orders, pulled the market down strongly at the opening bell.  The Dow was quickly down about 65 points and traded around there for about an hour.  

At that time, the Fed chairman, Bernanke was talking again but he didn’t say anything the market wanted to hear resulting in another round of selling late morning taking the Dow down about 135 points.  From there we saw a pretty good rally, 75 points or so, going into the lunch hour.  The market couldn’t hold that ground and finished where you see in the table below with the Dow down nearly a hundred points.  The NDX, NASDAQ 100, closed right on the low of the day.

Nothing is ever easy and this market is a difficult as it can be.  We believe the market wants to go down in a strong selling wave after correcting the first down leg that started last month.  Right now the Dow has retraced about the right amount of the decline.  In our earlier posts we talked about the 12,500 area as the most likely area for the Dow to get to on this correction.  Last Friday morning the Dow traded at 12,511 which is almost picture perfect.  

So, why do we sound so unconvinced?  Well, the decline from last Friday’s high has not been one to make us confident in a strong decline.  But, as long as last Friday’s high stays in tact we must continue to think the market wants to go down.  The short term does not always play out the way you want it to but we still would like to see a small rally to keep everyone guessing as to what the market is doing.  Plus, a rally would give us another chance to play in the fire, with put options.

One thing to consider as we watch the market turn is the preponderance of bad news with regard to the economy.  According to the guys over at, when the market gets in gear on the downside here, there should be something new going on in the news.  In the rally phase we have been in since late 2002, the stock market has heard mixed news such as housing was strong and oil is strong.  You wouldn’t think that these two things could be compatible and bullish but stocks rallied.  When the market goes down this time, the news should match up with the down move—bad news matches up with lower stock prices.  Right now, we think it is safe to say the news is mostly bad.  

Dow Industrials:  12,300.36  -96.93
VIX: 14.98
HUI:  340.29
QQQQ:  43.52
QQQRR: 1.48 bid
QQQRT:  2.65 bid
RYVNX:   17.17
RYAIX:  21.67
RYCWX:  36.80
TLT:  88.57
BEGBX:  13.89

Tuesday, March 27, 2007

Real Estate Makes the News

Market Action (Real Estate based):
Before the market opened Lennar (LEN), a homebuilder, announced a steep 73% drop in earnings and warned that conditions might get worse before they get better.  The company said it couldn’t determine when conditions might improve and they “have not yet seen evidence that the much-anticipated winter/spring selling season has yet kicked in” and maybe “there’s another shoe to drop”.  In fact, the company had been comfortable saying that 2007 earnings per share would meet the 2006 level but now they’re not so sure about making such predictions in this environment.  Of course, the recent deterioration in subprime was a contributing factor.

With this news, the stock market opened with a thud but before we get all teary eyed over LEN, you might consider that the stockholders of LEN only dropped the price 4 cents by the end of the day after being down nearly two dollars at the opening.  No fear.

There has been a rumor floating around that New Century Financial (NEWC, remember the cute name, nuke) was going to file for bankruptcy.  On Tuesday, the rumor was gaining some traction.  Of course, with the price of the stock dropping 15 cents to 1.41 or about 10% it’s only a matter of time anyway.  You may recall this stock was 30 in the beginning of February and 65 in December 2004.

A half hour into the normal trading day, the Conference Board released a weaker than expected 107.2 consumer confidence number.  The forecast was for 109.0 after last month’s 112.5.  Oh, last month’s number was revised down to 111.2 so maybe the decline didn’t look as bad as it could have.

The market managed to trade in a fairly tight range after the initial hit and the volume was painfully low.  After the market closed another home builder, Beazer Homes (BZH) announced that their lending practices had earned the attention of the FBI and that an investigation into their mortgage lending practices was being initiated.  BZH dropped about 15% in after hours trading to prices not seen in about four years.  

There was some other activity in the after hours market that we should mention.  You will most likely have heard this news by the time you read the Update but there was a brief moment when a rumor surfaced that Iran had fired a missile at a US ship in the Gulf, soon after denied by the State Dept.  Oil briefly popped above $68 but managed to shed most of the gains as soon as the denial crossed the wire.

There was one more real estate item we saw and that was on CNN  While we have never heard of this organization, the Center for Responsible Lending, a non-profit policy and advocacy organization for home owners, suggested that 2.4 million holders of subprime mortgages would lose their properties to foreclosure.  The CRL said that the primary reason for the jump in foreclosures is “the abandonment of underwriting standards.”  

Quoting from the CNN Money article, “CRL contends that few subprime loans went to first time buyers” with some 11 percent of the total going to first time buyers.  Where did the mortgage money go, you may ask???  That would be refinancing existing mortgages including additional fees.  Did we mention that this was going to be about real estate???

We don’t have much else to write about this evening.  We were thinking that the market might actually break on Tuesday (surprises to the downside) but when it didn’t, we went back to thinking we would see a little rally going into the later part of the week.  Friday’s Dow high is still in place so it may actually hold.  Remember that’s not the point—the point is that this rally phase is nearly complete and we are going to be looking at much lower prices over the next several months.  

Believe it or not, the market is short term overbought even after Tuesday’s trading.  The overnight futures are still down, maybe due to the rumored attack in the Gulf, but they are down.  If the market drops much at the opening on Wednesday it may break the minor support levels created on Monday.  If so, there could be some quick sand for the market.

One last item we keep wanting to mention, that being the NDX, NASDAQ 100.  We mentioned a few weeks ago that the NDX has crossed over the 1800 line in many trading days from mid-November to mid-February.  Over the past week, the NDX is back trading across the 1800 mark again.  We think it missed its old friend and decided to come back and say farewell, we’ll see you a long time from now.  

Dow Industrials:  12,397.29  -71.78
VIX: 13.48
HUI:  340.50
QQQQ:  43.99
QQQRR: 1.21 bid
QQQRT:  2.26 bid
RYVNX:   16.80
RYAIX:  21.44
RYCWX:  36.21
TLT:  88.75
BEGBX:  13.89

Monday, March 26, 2007

New Home Sales Fall

Market Action:
On Monday morning the market heard some believable news on new home sales, that they were down, a lot.  This news met with some sudden selling.  We’re not sure why the response was to sell; after all, the market seems to have liked the possibility of the Fed lowering rates.  (yes, some sarcasm)  

The housing news was pretty negative even though the headline number was that the new home sales were down 3.9% to an annual pace of 848K.  They did report that this number was down 18.3% below a year ago levels and followed a 16% decline in January.  Let’s get back to the headline number.  

We said (for the third post now) that the expectation was for 995K annualized new home sales.  How do they calculate a 3.9% decline last month?  Last month’s figure had been reported as 937K but this month that number was revised down to 882K, a miss of about 55K.  From there the new number came in at 848K which is down 3.9% from the 882K.  Follow?  This is the new math from the government.  They’re here to help us.  Our math shows us that the economists’ estimates were off by about 15%, yicks.

At any rate, the Dow went down about a hundred points before finding a bottom and then ground higher all day long with a pretty good spurt in the final hour.  The Dow couldn’t manage to close up on the day but the other major indexes did.  

Our assessment is that the market decided it couldn’t be going down just quite yet.  We normally watch Monday’s for some strength and we definitely watch for news related declines that don’t have any follow through.  So, today was one of those days that didn’t really help the bearish case.  

We now have a few days for a market reconciliation before we decide what to do.   The end of the month tends to be fairly strong and this being the end of the quarter, we want to be ultra-cautious with our money.  That’s not to say the market can’t go down from here, it certainly can.  We just don’t want to be in the way of any upside that may occur.  Plus, any more upside would give us an even better position to buy some puts.

Our Moves:
The way the market traded right after the new home sales came out was uncomfortable enough to make us want to exit our options so we sold them at about a 20% profit.  We remind you that these trades are for small dollars relative to our portfolio and the trading is mostly for fun and profit.  Options can be dangerous as they tend to move more than you like sometimes.  We were satisfied with our trade but we are still waiting for a good signal from the market that a big down wave has started.

Dow Industrials:  12,469.07  -11.94
VIX: 13.16
HUI:  345.93
QQQQ:  44.30
QQQRR: 1.13 bid
QQQRT:  2.13 bid
RYVNX:   16.56
RYAIX:  21.28
RYCWX:  35.79
TLT:  88.90
BEGBX:  13.89

Sunday, March 25, 2007

Possible Top Last Friday

Market Action:
Besides the fact that we said the new home sales would be reported on Friday, we did get to see the existing home sales.  We’ll have to wait until Monday morning to get those new home sales which are expected to be 995K as we mentioned in our last post.  As for the existing home sales that came out a half hour after the opening bell, they were stronger than expected and were up about 4%.  We here at the Update are scratching our proverbial heads wondering how this could happen but the report is there for the whole world to see.  

The reason we bring up the existing home sales is that when the news hit the tape, the market jumped with the Dow moving up over the 12,500 mark.  No, it didn’t move over it by much, maybe 10 points but it did go above it.  We do want to remind the astute players that the existing home sales don’t get recorded until closing so those sales were made a fairly long time ago—before all of this subprime news hit the media.  The new home sales, reported on Monday morning, are recorded when the sale is made so it is a much more up to date figure.

Maybe we sound like we’re whining about the report on existing home sales but we really can’t understand how this number could have gone up.  This does not deter us from looking at the bigger picture of the market which shows us the topping pattern that we have been looking for.  The market should have seen its high around a half hour into Friday’s session and we expect a down turn from these levels.

There is always the possibility that the upside has not run its course but we do see several signs in the technicals that we follow that lead us to believe that the corrective wave is over.  There are some sharp declines coming over the next several months and we are about to see one of them.  We can’t predict the exact day but it is very near.  

Our Moves:
That said, we will be looking to increase our exposure to the short side of the market by adding some more puts.  Friday morning when the Dow pushed through 12,500, we were able to set up one position and we decided on the QQQRT’s and got in at 2.13.  We thought that Monday may bring a little more upside so we are looking at some other positions tonight and will continue to pursue them in the morning.  Maybe we will have another opportunity in the morning.

Upcoming News Items for the week:
Monday—February new home sales—yes, really this time
Tuesday—March Conference Board consumer confidence
Wednesday—February durable goods orders
Thursday—Final 4Q GDP
Friday—February personal income and spending

Dow Industrials:  12,481.01  +19.87
VIX: 12.95
HUI:  340.86
QQQQ:  44.12
QQQRR: 1.23 bid
QQQRT: 2.26 bid
RYVNX:   16.72
RYAIX:  21.38
RYCWX:  35.71
TLT:  88.79
BEGBX:  13.87

Thursday, March 22, 2007

Close to a High

Market Action:
Overnight on Wednesday, MOT (Motorola) said it expected a first quarter loss of about eight cents.  This negative number is in sharp contrast to analyst figures of about 17 cents, that would be in the positive.  On that news the stock took a tumble in after hours trading on Wednesday and on Thursday dropped about 6.5% in regular trading.

MOT’s news caused some negative reactions in the tech world and the NASDAQ opened on a weak note.  Both the Comp and the 100 (NDX) were down on the day but not much even as the Dow managed to add 13 points.  The trading day was rather subdued after Wednesday’s big rally.  

Other News:
The market had to deal with another piece of news, too, that of the leading economic indicators (LEI) which fell 0.5% after expectations were for only a 0.3% drop.  This number by itself wouldn’t be considered so bad but there was a revision to last month’s number from up 0.1% to down 0.3%.  So, we figured they got the 0.3% drop number right except it was for the wrong month.  That was a big miss, nearly 0.4%.  Now, if the March LEI is also down that would make three months in a row, which could be starting to forecast a recession…nah, couldn’t be.

Tomorrow we get to see new home sales.  We anxiously await the number.  Expected is that they will be 995K on an annual basis which represents a 2% decline after last month’s surprising 3% increase…That reminds us that KB Homes (KB) had news on Thursday morning.  KB, the number 5 US home builder, said that its net profit fell some 84%.  Then they went on to say that higher foreclosures and tighter lending standards in the broader market could prolong weakness in the sector.  Sounds like a turn around is in the making???

From our perch on the side of the market, we think the corrective rally we have been in for the past couple of weeks is about over.  At least, we think that the price high is very close to where we are now.  We expect a little more rally to complete the pattern and then we should see some significant downside.  Any rally that pushed the Dow into the 12,500’s would be an invite for us to take another option position.  We indicate a couple of options again in the table below but we can’t be certain that either one of those would be what we would buy.  If we were to buy one of them we would probably lean toward the QQQRT which has a 46 strike and would probably give us somewhat better leverage.

Have a great weekend and sleep well.

Dow Industrials:  12,461.14  +13.62
VIX: 12.93
HUI:  340.52
QQQQ:  44.26
QQQRR: 1.14 bid
QQQRT:  2.13 bid
RYVNX:   16.59
RYAIX:  21.30
RYCWX:  35.78
TLT:  89.04
BEGBX:  13.93

Wednesday, March 21, 2007

Fed Calms Fears

Market Action:
The Fed statement “lit ‘em up” due to the dovish statement.  (Really, we don’t need to talk about anything before the Fed announcement, do we?)  The main item of focus seemed to be the deleted statement, that being the reference to possible “additional firming” with regard to interest rates.  Clearly, the Fed is not clear…but the Fed did want to ease some concerns in the markets with their statement.  

The Dow cruised up at warp speed to add a cool 60 points in about a minute before going on to a close of up 159 on the day.  The late afternoon rally took the Dow very close to our 12,500 figure but just couldn’t make it trading around 12,480.  

We here at the Wednesday Update have been saying for months that the Fed was not going to raise rates again, at least until after they lowered them first.  The market however felt that the Fed was threatening a little upside action on rates for the past several months which is why the market’s advance seemed to slow to a halt, or so the media would have us believe.

We find the Fed’s statement on inflation to be a little contradictory to the positioning on interest rates.  They have been telling us that they are watching core inflation and that they don’t like it above 2%.  They have been saying that inflation is peaking and we should let the past interest rate hikes do their magic on inflation.  Their announcement said that inflation has been somewhat elevated compared with their January stance that there had been some modest improvement there.  Their official position now is that economic growth will moderate and inflation would back down a bit.

The stock market moved ahead with some strength after the announcement.  We were not surprised because the market was looking for just about any positive words from the Fed which we knew would be delivered as ordered.  

Our current position on the market is that we are very near the top of this corrective move.  As we have mentioned in the past few weeks, this first corrective wave should be fairly strong because bullish enthusiasm is still prevalent.  The next few days should see the end of the up wave and then we should see a dramatic down wave.  

Real Estate:
We heard that the WSJ had a good article on the mortgage situation and thought we would bring it to your attention.  In Wednesday’s edition on page A19, Andy Laperriere wrote a commentary in the opinion section of the paper called “Mortgage Meltdown”.  It is a fairly short article but has a lot of pertinent facts in it related to the current situation.  We quote a couple of lines directly but we highly recommend you try to find and read the full article…

“As the home price boom gained momentum and delinquencies dropped, lenders offered progressively easier and riskier lending terms. Common sense suggests that the boom-time mania that led banks (and investors in mortgage-backed securities) to offer dangerous loans to individuals with poor credit histories also led them to offer the same kinds of risky loans (no income verification, no down payments, high payments as a share of income, low teaser rates) to individuals with good credit scores.

“Far from being limited to the subprime market, the data show these risky loan features have become widespread. According to Credit Suisse, the number of no or low documentation loans -- so-called "liar loans" -- has increased to 49% last year from 18% of purchase loans in 2001, a nearly three-fold increase. The investment bank also found that borrowers put up less than a 5% down payment in 46% of all home purchases last year. Inside Mortgage Finance estimates that nontraditional mortgages -- mostly interest-only and pay-option ARMs that allow the borrower to defer paying back principal or even increase the loan balance each month -- which barely existed five years ago, grew to close to a third of all mortgages last year.”

Our Moves:
We haven’t done any options trades this week and Wednesday’s market gave us some much better prices to make some trades in the next week or so.  With the market moving up, we think we need to change the option of choice.  We traded the June 44 put on the QQQQ’s but with the QQQQ’s rallying we may want to move up a strike price or two so we are indicating the June 46 in the table below.  We won’t know which options we will buy until we do but we like the highest leverage possible if we are risking the capital.

Dow Industrials:  12,447.52  +159.42
VIX: 12.19
HUI:  341.83
QQQQ:  44.42
QQQRR: 1.10 bid (we need to move to a higher strike)
QQQRT:  2.05 bid (this is the 46 put for June)
RYVNX:   16.45 (nice buying price)
RYAIX:  21.21
RYCWX:  35.84
TLT:  89.75
BEGBX:  14.00 (dollar nearing a low)

Tuesday, March 20, 2007

Fed Day Again

Tonight’s post will be brief (we usually like to say “short” but you already know that) as it is getting late.  Once in a while, the staff here at the Wednesday Update gets a night out and tonight it was to go to the Minnesota Wild hockey game.  Thanks Jason for the tickets.

There are two notices we would like to mention tonight which we have neglected to mention the last few posts.  The first is that the folks over at are having a free week this week which expires on Thursday.  You need to sign up for their club EWI in order to see some valuable information but there is no fee for signing up.  Of course, they would like you to take their service which is why they are advertising some.  

Next, the True Contrarian posted on Monday and he’s always a good read—the bold section part way down the page is the new info.  He comments on housing, the stock market and the dollar.  Worth the time especially since this post will be so short.

Market action/Opinion/Analysis all in one:
The market managed to continue up on Tuesday which may mean the Dow wants to head up to that 12,500 number we talked about the last couple of weeks.  Tuesday’s volume didn’t amount to much so these rally days are not giving us much from a technical standpoint.  We have in the back of our mind that surprised will come to the downside now that the market has turned down and we will not be surprised to see some downside at a moment’s notice.  

Remember the FOMC will make their announcement on short term rates just after lunch on Wednesday (1:15 CDT).  The rally we have seen in the market seems to indicate that the market expects the Fed to lighten up on rates pretty soon, at least in their comments this week.  If these words don’t appear on Wednesday, there will definitely be disappointment.  The market thinks that the Fed needs to address subprime and some indications that the economy is not as firm as once thought, and it needs to address those issues now.  We’ll see what they have to say in the afternoon.

Dow Industrials:  12,288.10  +61.93
VIX: 13.27
HUI:  332.51
QQQQ:  43.58
QQQRR: 1.47 bid
RYVNX:   17.21
RYAIX:  21.69
RYCWX:  36.79
TLT:  89.71
BEGBX:  13.96

Monday, March 19, 2007

Solid Up Monday, Low Volume

Market Action:
As the market opened for the week, the buyers were pushing up prices with a 90 point pop in the Dow in the first few minutes after the opening bell.  This move put the index right at the 12,200 mark and then it moved back down as if to say it was going down from there.  But, the decline was contained and the Dow moved up to the 120 point advance range and traded around that level most of the rest of the day.  

The big news was the ABN AMRO deal in which it would be acquired by Barclays for about $80 billion.  This acquisition would be Europe’s largest banking deal.  This acquisition also made for a big move on Wall Street at the opening.  The only major index that wasn’t invited to the party was Semi-Conductors.  

Real Estate News:
We felt compelled to mention the housing sector this evening since you have been reading so much about it recently.  The news seems to leave some of the key thinking processes out of the story.  We figure that the media doesn’t really know what to think of this giant drag on the economy that we have been forecasting for nearly two years.  And, of course, the world is waiting for the Fed to bail them out.

The one news item on Monday happened to be the US home builders’ confidence index.  This index has been under 50 (the balance between poor and good sales) for 11 months now and this past month the index fell for the first time in six months.  Remember that this is now spring and probably a good time for new home sales.  

We get more news on Tuesday in the form of February housing starts and Friday’s report on February existing home sales.  These should be interesting reports.

Don’t forget about the FOMC meeting this week with the interest rate announcement on Wednesday afternoon.  Their statement should prove entertaining at least.

With the Dow moving to a price above 12,200 we think the time to become a little more aggressive is here.  Corrective moves can be a little hard to read but any upside from here should be limited to a couple hundred points.  We think that Monday’s actions could very well be the last move up but you never know for sure until the market heads down and breaks through some of the price levels of the last few weeks down around 12,000.

We didn’t get a chance to get into those QQQRR puts due to work getting in the way but with some more upside in the next few days there may be some other opportunities.  We would like to have the Fed’s decision behind us to commit new funds at this time but if we get a good opportunity we will take it.  The Fed news on Wednesday will only serve to confuse the masses.  

One highlight for Monday was the low volume we saw on the NYSE.  This is the lowest volume in almost a month and the market rallies 115 points.  In case you might be wondering, this is not bullish.  The market is going down, make no mistake about it.

Dow Industrials:  12,226.17  +115.76
VIX: 14.59
HUI:  330.76
QQQQ:  43.27
QQQRR: 1.66 bid  (getting interesting)
RYVNX:   17.38
RYAIX:  21.80
RYCWX:  37.15
TLT:  89.66
BEGBX:  13.92

Sunday, March 18, 2007

It's Fed Week Again

Market Action:
Friday’s quad witch brought us quite a bit of volume in stocks early but as the day wore on, volume was about average.  By the end of the day, the NYSE did surpass the 2 billion share mark, again on a down day.

In the first hour, after dropping a bit at the opening, due to Friday’s more than expected increase in the CPI, but the market tried to stage a rally which took the Dow up just a little higher than Thursday and still under the 12,200 line.  From that high, the Dow spent most of the day dropping but there was not much conviction about the decline.  As the market closed, the Dow had rallied a little to close down almost 50 points.

The drop we saw in the Dow from the high on Friday morning didn’t seem to be very strong and that gives us pause to wonder if the corrective wave (up) is still active.  The most we can say is that the market reserves the right to go higher.  This weekend we noticed a lot of attention being given to the subprime mortgage situation.  This is happening at a time when the media has already used that excuse to explain the drop in the market.

While our premise has been that the housing market would ultimately take down the market, we still have to be watching the movement of the market.  The contrarian in us has to wonder why there is so much attention focused on the subprime issue.  (You know how long we have been talking about subprime—it’s all in the archives.  Of course, we have talked more about the entire mortgage situation for a long time.)  

Beyond that, there seems to be a lot of whining about the drop in the market and that the Fed should now respond by lowering rates.  This cry comes after a decline that is about a week old.  We can only wonder what might happen when the market drops for a month or two or more.

The Fed is meeting this week and we will see if they have the capacity to withstand the fervent drumbeat of the market participants for a rate cut.  They probably can’t lower rates this week but you know as well as anyone that the Fed can signal their intentions.  That is in order not to scare the poor stock market.  The Fed news comes on Wednesday at the normal 1:15 CDT.  

Our Moves:
We were strongly pulled to act on Friday morning when the Dow reached up to nearly touch the 12,200 level but we failed to pull the trigger.  We are hoping for a Fed rally this week to give us a good opportunity.

This Week’s News:
Tuesday—February housing starts and FOMC starts
Wednesday—Fed’s decision on rates
Thursday—Leading Economic Indicators (lei)
Friday—February existing home sales

Dow Industrials:  12,110.41  -49.27
VIX: 16.79
HUI:  327.01
QQQQ:  42.83
QQQRR:  1.95 bid
RYVNX:   17.70
RYAIX:  21.99
RYCWX:  37.86
TLT:  89.85
BEGBX:  13.95

Thursday, March 15, 2007

Et tu Brute

Market Action:
The Ides of March was actually rather dull, no betrayal, no killing, just a lackluster day all around.  Thursday morning’s report on the PPI was enough to hold the market down a little.  Prior to that report the futures were very much in the positive but the 1.3% increase in the PPI for the month forced them to drop.  The opening was mostly flat, not down, but the way the futures had traded into that number, you might have thought the market would be up about 1% at the bell.

The Dow rallied starting about 15 minutes into the session and looked like it would push up to our 12,200 target but it fell about 15 points short, but still up about 50 points.  We had a moment of maybe this is the end of the rally but didn’t act on it.  About mid-day the Dow broke and moved back down to the opening levels before moving up a little into the close, up about 26.

Greenspan decided to open his mouth again, this time that high home prices are going to be a bigger problem than sub-prime mortgage issues; that news again subdued the market and after hours the traders sold off stocks somewhat.  

This has been a volatile week and we are looking forward to it being Friday with a weekend coming up.  We do have the options expiration in front of us tonight which may prove to be an opportunity.  The CPI is due out in the morning and given the reaction to the PPI news on Thursday morning, a jump in the CPI could cause some more pain.  We do not expect it.  What we do expect is a heavy volume day with the quad witch going on.  There may be an opportunity for us if we can see some upside.  So far this evening the futures are still down on Greenspan’s comments.

Have a good weekend.

Dow Industrials:  12,159.68  +26.28
VIX: 16.43
HUI:  326.08
QQQQ:  42.89
QQQRR: 1.90 bid (do not own)
RYVNX:   17.63
RYAIX:  21.94
RYCWX:  37.51
TLT:  89.87
BEGBX:  13.87

Wednesday, March 14, 2007

Beware the Ides of March

Market Action:
Wednesday’s opening was a little ragged as traders couldn’t decide what to do at first.  As the morning wore on, sellers came in to push the Dow down about 135 points.  From there, a rather spirited rally ensued pushing the Dow up about 57 on the day at the close.  That meant that the rally carried nearly 200 points from the lows of the day to the close.

This eventuality happened to be mentioned in our post from Tuesday evening.  With such a strong down move into mid-day Wednesday and with options expiration due on Friday and with such a strong down move for the last month, the Dow seemed ready to rally.

The latest down move which ended on Wednesday around mid-day was the beginning of a series of down moves, all of which will have corrective waves built into them.  Today’s low near 11,940 is the bottom of a move that started on Monday near the close when the Dow traded near 12,350 indicating about a 410 point drop.  Given Wednesday’s rally moved up about 200 points the market has corrected about half of the up move so far.  

The one standard is that any surprises will occur to the downside.  With that in mind, we can try to fine tune the possible moves until this current corrective up move is done.  Going back to the first comment in this paragraph, the move might be done now.  More likely is that the next move will be down and tomorrow’s PPI could drive that move.  Then we should have a rally that pushes the Dow up near 12,200 at which time we should see another drop.

With the pattern the market is in, that drop should be a powerful move, something that Elliott wavers call third of third, the most powerful move in the sequence.  Guessing how far that move would go is like this:  Start with the first part of this latest down move, that being the 410 points from Monday to mid-day Wednesday.  A minimum move would be 410 points down from the 12,200 we talked about in the last paragraph but that is our guess for the high in the next few days.  The down move would need to be measured from the top of the move, whatever it is.  

For our example, we would look at 12,200 and subtract 410 points getting us down to around 11,800.  This is the Minimum move in the sequence and more likely it would be a Fibonacci multiple of 1.618 times 410 points or about 665 points.  Subtracting the 665 from our guess of 12,200 would get the Dow down to around 11,550 or so.  Stay tuned.

Our Moves:
As we were able to see the lows of the day mostly over lunch, work didn’t get in our way.  With our notion that the market might stage a Wednesday turnaround during this options expiration and with good profits in our puts, we traded out of our QQQRR puts.  Granted, this was a small trade but this kind of trade, the kind with 40% profits, can make a month.  We anticipate putting this trade back on later this week, probably Friday but we won’t know until the market makes its move.  

Dow Industrials:  12,133.40  +57.44
VIX: 17.27
HUI:  320.56
QQQQ:  42.99
QQQRR: 1.89 bid  (days range 1.95 to 2.55, we are out at 2.45)
RYVNX:   17.66
RYAIX:  21.96
RYCWX:  37.66
TLT:  89.88
BEGBX:  13.91

Tuesday, March 13, 2007

Turnaround Tuesday the Other Way???

Market Action:
Three Tuesday’s in a row the market has had some fireworks.  This week’s Tuesday trading was decidedly negative with the Dow trading down 242 points.  The other major indexes were down similar percentages (around 2%).

The market started on the wrong foot with the early morning news from LEND (Accredited Home Lenders Holdings) that said they were basically following in the footsteps of the recently de-listed NEW (New Century Financial).  When LEND opened for trading, it opened with a 50% reduction in price and then fell some more to close at a 65% loss.  Speaking of NEW, it has a new ticker because it is off the NYSE.  The ticker is NEWC.  What does that sound like?  NUKE???  (The credit for this gem goes to

Today these subprime mortgage losses bled over to some of the financial names such as Washington Mutual, Morgan Stanley, Merrill Lynch, Goldman Sachs, and others, all having multiple point losses in their stocks.  (Goldman Sachs wants to get deeper into the subprime-lending business according to the WSJ.)

Meanwhile, the semi-conductor stocks were trying to buck the trend in the early going but couldn’t resist the downturn by the end of the day.  Their losses were not as severe as the broader market and certainly not as much as the financials.  Looking at the indexes, the SOX (Philadelphia Semi-Conductor Index) was down 1.66% while the Bank Index was down an outsized 3.26%.  The broker’s index was down 4.42% and the gold mining index (HUI) was down 3.89%.  The one index that was up, of course, was the Volatility Index (VIX) and that was up 29.6%.

Reader Comment:
My thanks to a reader (CM) who sent us an article on the ISE Sentiment Index, something we have never heard of before today.  This index is similar to the put call ratio from the Chicago Board of Options Exchange (CBOE) except its kind of the opposite since it’s the call put ratio with a twist.  The title of the article is “Contrarians are smiling” by Mark Hulbert.  It’s on the site which you should be able to find for more info.  The point of the put call ratio is that it is normally considered a contrary indicator because if there are more puts purchased more people are bearish, which of course means that stocks should rally—speaking in the contrary.  

Our take on the put call ratio is that it can be particularly difficult to use effectively which is why we normally don’t mention it.  The CBOE indicates a put call ratio for regular stock options and another for index options and then the combination of the two.  The index options could be considered the “smart” money and if this index goes out of line, we probably should pay attention and Not consider it a contrarian index.  Actually, such has been the case in that index recently.  The put call ratio has spiked and may well indicate a time to sell.  Or, if Mark Hulbert is correct, it is a time to buy because it is a contrary index.  Anyway, thanks for pointing out the article.  We enjoyed it.

The stock market decided to try a different direction on Tuesday than we expected.  With the break this morning and going into the afternoon, it seems the market wants to go down now.  While that may change Wednesday, for now, we think the weight of the evidence supports continued weakness over the next several weeks.

First, we saw volume swell to nearly 2 billion shares on Tuesday when it had been around 1.5 billion shares during the past week when the market was advancing.  Also, during that advance, the 5 day upside volume peaked on Monday over 1 billion shares, a number sometimes associated with a peak.  And, the pattern of prices does seem to indicate a potential for some more selling.

There is one short term glitch in that plan and that is this week’s option expiration, which happens to include the futures expiration (quad witch).  Sometimes when the market has been going in one direction into the Wednesday of the expiration, it turns and finishes out the week in the other direction.  We don’t want to assume this will automatically happen but there is that possibility.

Either way, we think the market over the next couple of months will be down and we are positioned for that.  Any near term advance will allow us to buy some more puts and move that put call ratio up.

Late Addition:
Erick just posted a question/comment in the comments about the Asian markets.  We did notice that Japan was down about 3% on yen concerns, not to mention the NYSE got hit pretty hard.  The Nikkei Dow is made up of 225 stocks so a little more than the Dow 30 to answer the question.  Still, these numbers are big moves for the broader market, too.  Not too many stocks get to miss out on a move like that.  In our S & P 500, there were only 12 stocks up on Tuesday, for example.  Thanks, Erick.

Dow Industrials:  12,075.96  -242.66
VIX: 18.13   (up 30%)
HUI:  318.72   (down almost 4%)
QQQQ:  42.37
QQQRR:  2.28 bid   (up 33% since Friday’s purchase)
RYVNX:   18.09
RYAIX:  22.22
RYCWX:  38.01
TLT:  90.29
BEGBX:  13.86

Monday, March 12, 2007

Monday's Little Rally

Market Action:
As the market opened on Monday, the traders seemed somewhat undecided on which way to go.  When everything was said and done the broader market ended up on the day.  Such is the case on Monday.  

The news on NEW (that would be New Century Financial) had some negative drag on some larger stocks involved in the subprime mortgage market but, even though the NYSE failed to open NEW for trading, those stocks managed to trade higher for the most part.  (Off the exchange, trading in NEW cut the price nearly in half from Friday’s close.)  That didn’t stop the tech rally which got going right away, although it stalled late in the day.

The stock market seems to be continuing to trace out a corrective move allowing more of the first wave down to be retraced.  This eventuality could get the Dow back up to that 12,500 level we have mentioned for the past two weeks.  That move alone could completely erase the 400+ point drubbing the Dow experienced just two weeks ago.

The market has given every indication so far that it intends to go lower unlike so many on Wall Street would like you to believe.  The most notable characteristic is the volume on the NYSE.  As the Dow was dropping a couple of weeks ago, the volume was over, or at least near, 2 billion shares almost every day.  Since we started to move back up, the volume has dwindled such that the last two days trading has been less than 1.5 billion shares.

Another indication is our momentum indicators that show the market is easing the oversold condition it is in by time rather than price.  What we mean is that prices are not moving up very much but the time since the drop is the main ingredient in helping momentum stabilize.  

Our assessment is that the market is moving a little higher from here and then we will finally see some real selling pressure.  The move is just ahead and the Ides of March, that would be Thursday for those of you who are still trying to get over the new daylight savings time, looks like a good day for such a thing.  That doesn’t give us much time to put on a couple more trades…

Our Moves:
Well, we might have acted a bit too early on Friday but we only picked up part of our position anyway so there is still some powder dry for selling into some strength this week.  We were not surprised by the market on Monday due to the lack of downward thrust on Friday but we do wish we could have exited our nice profitable position on Friday.  Monday it’s sitting with a minor loss.  (Don’t forget, the options plays are just for the fun of it mostly.  The main part of our assets is sitting in leveraged short positions.)

Dow Industrials:  12,318.62  +42.30
VIX: 13.99
HUI:  331.62
QQQQ:  43.21
QQQRR:  1.73 bid  (guess we should have taken that 35 cents)
RYVNX:   17.41
RYAIX:  21.79
RYCWX:  36.61
TLT:  89.75
BEGBX:  13.85

Sunday, March 11, 2007

Keep Your Eyes on Real Estate

Market Action:
Friday morning’s jobs’ report was pretty much as expected with just under 100K jobs created while the January’s number was revised up by 35K.  The unemployment rate did drop 0.1% to 4.5%, which of course doesn’t mean too much given what it is measuring.

Importantly, the stock market decided to move up on the news opening up a small window of opportunity for selling the opening.  As for trading, the NDX opened with nearly a 1% pop followed by a move that took it back down to even in under an hour.  There was another attempt to sell it off during the afternoon that looked pretty promising on the downside but led to a strong close instead.  As for the Dow, it jumped 65 points at the opening and followed a similar pattern to the NDX.  

Real Estate:
This weekend, real estate seemed to be attracting our attention as we read through several articles.  For those of you who have access to the online version of the New York Times (all it takes is to register and you can read the article), there is an article by Gretchen Morgenson entitled “Crisis Looms in Market for Mortgages”.  

Here are a few highlights from the article:  The first paragraph starts like this, “On March 1, a Wall Street analyst at Bear Stearns wrote an upbeat report on a company that specializes in making mortgages to cash-poor homebuyers.  The company, New Century Financial, had already disclosed that a growing number of borrowers were defaulting, and its stock, at around $15, had lost half its value in three weeks.”

That report probably was responsible for the little increase in price on NEW on March 1st, the stock moved up above 16.  NEW is mentioned in our March 5th post saying that the stock dropped 70% that day to 4.56 and now by the end of the week it closed at 3.21.  The NY Times articles says that the Bear Strearns’ report indicated a downside risk of about $10.  

The article quotes Thomas A. Lawler, founder of Lawler Economic and Housing Consultant as saying “I think there is no doubt that home sales are going to be weaker than most anybody who was forecasting the market just two months ago thought.  For those areas where the housing market was already not too great, where inventories were at historically high levels and it finally looked like things were stabilizing, this is going to be unpleasant.”  Oh really, unpleasant, you say.

There are some interesting facts in the article about “liar loans”, those loans that people were able to make a statement on their income and no one would actually check it against real documentation.  Apparently, in April of 2006, that’s almost a year ago, a report by the Mortgage Asset Research Institute “analyzed 100 loans in which the borrowers merely stated their incomes, and then looked at documents those borrowers had filed with the IRS.  The resulting differences were significant:  in 90 percent of loans, borrowers overstated their incomes by 5 percent or more.  But in almost 60 percent of cases, borrowers inflated their incomes by more than half.”  

As we looked at the market on Friday morning, we thought it might have been a good opportunity to get on board some puts.  Back on March 1 we mentioned the possible retracement levels in the Dow and the lowest one we thought would occur was 12,340.  Well, Friday’s early morning push had the Dow up to 12,330 before it rolled over.  

We have mentioned previously that the first move up should be attended by a pretty strong up move because there should still be some major bullishness.  And, there sure seems to be a lot of bullishness around, at least in the media.  We’re not so sure that it is deep enough for buying to occur.

The volume of the past few sessions, you know the ones that have come After the fall, has been noticeably weaker than during the drop.  This has given us even more fuel for the bearish case.  We expect that selling could come into the market at any time.  As we have tried to say in the past, surprises will be to the downside.

One other interesting item on Friday morning was the deep sell off in the bond market.  On what looked like inflationary pressures had eased somewhat, the bond market didn’t like the news for some reason.  We want to keep an eye on these developments.  

Our Moves:
Anyway, we felt at least somewhat confident about buying some puts on Friday morning.  We would have liked to see a bit more strength (giving us cheaper puts) but we set up a few trades in the morning.  As the day wore on, we didn’t like the action but we did stick with our puts.  We put on about half of what we wanted to put on so hopefully we will be in a position to make another trade this upcoming week.  The one trade we put on was the QQQQ’s June 44 put.  We got in at 1.71 in the morning right off the bat and the bid was 1.88 at the close even though it had traded up to 2.07 by mid-afternoon.  Work sometimes gets in the way or we may have taken those 35 cents.  

Upcoming News Events for the Week:
January business inventories—Tuesday
February Producer Price Index (PPI)—Thursday
March Philly Fed Report—Thursday
February Consumer Price Index (CPI)—Friday

Dow Industrials:  12,276.32  +15.62
VIX: 14.09
HUI:  328.24
QQQQ:  42.93
QQQRR:  1.88 bid (purchased on Friday at 1.71)
RYVNX:   17.63
RYAIX:  21.93
RYCWX:  36.85
TLT:  89.40
BEGBX:  13.78

Thursday, March 08, 2007

Jobs' Report May Provide Opportunity

Market Action:
The stock market got off to a rip roaring start again on Thursday with the Dow jumping a cool 100 points in the first hour.  That was pretty much it for the Dow as it traded in a range until early afternoon.  That must have been nap time as the Dow decided to go down about 75 points right after lunch making it look like the sell off was underway once more.  But, with a little more than an hour to go the major averages stabilized and then went out with respectable gains for the day but near the low end of the trading range for the day.

Probably the biggest news of the day came out of Europe where the ECB, European Central Bank, raised its key interest rate by 25 bps to 3.75%.  Ok, maybe it wasn’t that big of news because it was widely expected so it didn’t have much impact on the markets.  

Since it’s Thursday evening and our last post of the week, we wanted to talk specifically about the news item for Friday, that being the jobs’ report due out just before the market opens.  For most of you, the news will most likely be out by the time you read this so you will actually know what happened after the market opens but for us, we don’t know and we are trying to second guess the market.

There is some attention being paid to the jobs’ report this month since the number is expected to be a relatively low 90K to 100K of new jobs in February.  We speculate on the results of higher, lower and the Goldilocks “just right” result.  We almost believe that no matter what happens the market will open up in the morning.  Then there could be the start of a down move.  

We have been watching this market try to crawl out of its oversold condition the last few days and we think the market is trying very hard to come out but so far prices have not been able to get back up to our targets.  You may recall we have been calling for the Dow to move back to the 12,500 range.  After looking at the chart a little closer, there is some recent resistance in the 12,325 range which did contain Thursday’s advance.  The minimum retracement we would expect is near the 12,340 level and maybe that level will be reached in Friday morning’s session.

Our Moves:
On Friday morning, we will be interested to trade if we do actually get a strong opening.  In that case we would like to take advantage of the situation expecting that the latest rally is about all the market can muster.  Our trades will mostly be puts and we will limit them to the tech (INTC, AMAT) and financial (MER, JPM) areas with a possible look at the QQQQ puts for a market position.  We haven’t made up our minds this evening as to what actually to do but we will let you know on Sunday evening.  

Have a great weekend and here’s hoping you are in cash.

Dow Industrials:  12,260.70  +68.25
VIX: 14.29
HUI:  329.39
QQQQ:  42.97
RYVNX:   17.58
RYAIX:  21.89
RYCWX:  36.91
TLT:  90.35
BEGBX:  13.82

Wednesday, March 07, 2007

Not Much Follow Through Buying

Market Action:
The stock market didn’t do much in the way of follow through from Tuesday’s big upside move.  Given the condition of the market, and by that we mean how oversold it is, the Tuesday fireworks could very easily have carried over into Wednesday, something we kind of expected.  Of course, there is always Thursday.  

With the market trying to rally out of the big drop over the past couple of weeks, there is really little we can do but wait and watch.  As the market will decide in its own time when it wants to continue lower, we are obliged to try to figure out when that will be.  

Right now, even after the huge rally on Tuesday, the market is still oversold and needs either some time or some more upside to alleviate that situation.  As we mentioned in past posts, the market is weak and heavy and could drop through the floor at any moment, but we still think there is some upside correction left to go.  How much?  Well, corrective moves are much more difficult to predict but we have a good notion that 12,500 is in the area we are looking for in the Dow.

In the News:
The news item we are interested in is the Friday jobs’ report.  The economy hasn’t put up that many new jobs over the past few years but it does manage to chug along with 100K to 150K new jobs per month.  The forecast for Friday is for 100K new jobs to have been created in February.  This news point could be near the top of the corrective wave so we are going to be monitoring it heavily.  And, what little we will know on Thursday evening we will share with you, too.

Dow Industrials:  12,192.45  -15.14
VIX: 15.24
HUI:  329.34
QQQQ:  42.68
RYVNX:   17.80
RYAIX:  22.02
RYCWX:  37.32
TLT:  90.43
BEGBX:  13.88

Tuesday, March 06, 2007

Corrective Up Move Underway

Market Action:
Tuesday’s market was clearly the opposite of what we have been watching for the past week or two.   The Bears were literally hibernating all day long.  With so much bearish activity, the bears needed to rest.  All the major indexes were up over a percent with the RUT (Russell 2000) up almost 2.5%.

While we thought that last Thursday’s 200 spike low at the opening was probably the end of the first wave down, we may have to revise that based on the trading over the past two days.  Monday’s lows should be the bottom of the first wave, even though they are not much lower than last week’s low.  Tuesday’s action shows that the bull party is just beneath the surface.

This type of reaction is typical after a first wave down.  Most analyst’s are bullish and one itsy bitsy drop like this last one is a big opportunity to be buying stocks.  That is what the corrective up wave is supposed to do, make everyone feel like the down move is over.  We think that market has a few more up days in it before this second wave is complete.  And, as we have said, the bulls will make the up days violently so.  

Tuesday’s market was extremely strong technically, which is exactly how you know we have seen the end of the first wave down and the beginning of the second wave which is a corrective move.  Unfortunately, the end of this move could be a long ways up from current levels.  We guessed, using typical retracement factors of 38%, 50% and 62%, at where we think the corrective up move will go.  The Dow could make it back to the 12,500 level and if/when it does we will be getting much more bearish again.

This move up is a good time to be positioning for another wave down.  That means to be selling strength and to be concentrating on how to preserve principle.  There are a few days now to take care of business.

New Philosophy of the Wednesday Update:
This will be the last time we will be recommending things for you to do.  We will concentrate on what we are doing and let you know what those are.  These change periodically, even during the trading day sometimes.  We are much bigger (and hopefully, better) traders when the trend is down.  When the trend is up, less trading is necessary.

Bear markets are very difficult to trade but they are also devastating to portfolios.  Our purpose has been to help you find a way to get out of harm’s way, by moving into cash.  That strategy has done well for several years.  

We anticipate that 2007 will be a difficult year to make money in the stock market being long.  We are therefore maintaining our leveraged short positions.  This should be a good year for trading.

Dow Industrials:  12,207.59  +157.18
VIX: 15.96
HUI:  328.31
QQQQ:  42.85
RYVNX:   17.65
RYAIX:  21.92
RYCWX:  37.22
TLT:  90.08
BEGBX:  13.83

Monday, March 05, 2007

Turnaround Tuesday???

Market Action:
As the US markets opened after the weekend, the global sell off was beginning once again, but, as we have seen so many times, the early morning lows brought in some buyers and before long the indexes were green.  The Dow, which started with a 75 point loss had erased those and created a green plus 70 for a 145 point turnaround.

Shortly after that the market started to leak and, except for a rally attempt in the afternoon, the Dow faded into the close, closing very close to the lows of the morning.  That was quite a trip for the Dow, down 75 at the open, up 145 into the morning highs and then down 130 into the close.  

Besides the Asian market sell off, there was some other news that disturbed part of the market.  Late last Friday, one of the subprime lenders, New Century Financial (NEW), said that it is under criminal investigation by the SEC and it will likely breach a major lending covenant.  Some analysts are predicting the demise of the second largest US subprime mortgage lender.  

At about the same time, another subprime lender, FMT, Fremont General, said it was looking to sell off its subprime mortgage business.  This sale was prompted by a proposed order it received from the FDIC.  

As for NEW, today’s trading hit it pretty hard, down about 70% to 4.56 a share.  NEW had traded around 65 about two years ago and it was right around 30 for the month of January.  FMT didn’t fare as badly, down over 30% on Monday to 5.89 after trading in the 20’s for the last couple of years.

As we write this, the overnight futures are trading noticeably higher, which makes sense given the nature of the sell off over the past week.  The market is oversold and at some point will need to rally.  We wrote about the rally last week taking the Dow back up into the 12,500 area.  We have some reason to think that the rally could finally be here.

Here comes the other side of the story.  We have made statements in the past about the way down markets work, the real selling starts After the market is oversold.  Well, Friday the market showed us that it is oversold but Monday there was very little that looked like a rally, especially looking at the closing prices.  On Monday, there was some additional selling and the market went deeper into its oversold condition.  

The point of all of this is that the market is oversold and if a rally doesn’t start on Tuesday, there is a good possibility that the market could go down hard.  We think the probability is low for this event at this time but we know that surprised are going to happen to the downside now that the market has turned over.  We think the market will try to confound more investors over the next few days and rally out of this low that has formed near 12,000, sort of bouncing off the big round number in the Dow.

This first rally after the big fall is supposed to be strong in order to convince most that the break was a false break and now we’re off to the races again.  That would mean that a rally would be a normal thing for the market.  The problem with that theory is that that the market wants to go down as we saw on Monday and if it wants to go down, it will.

Monday’s technical picture was very weak with volume heavy again, although not quite 2 billion shares on the NYSE.  The volume was heavily skewed toward declining shares with less than 10% of the volume in advancing shares, similar to last Tuesday’s decline but not quite as bad.  Tuesday had about 1% of the volume in advancing stocks.  

Dow Industrials:  12,050.41  -63.69
VIX: 19.63
HUI:  314.86
QQQQ:  42.15
RYVNX:   18.28
RYAIX:  22.17
RYCWX:  38.23
TLT:  90.35
BEGBX:  13.82

Sunday, March 04, 2007

Down the Slippery Slope

Market Action:
Friday’s market showed little signs of trying to move higher.  The Dow closed down 120 points and very near the lows of the day.  Tuesday morning’s low is still intact but that may change in this fresh week of trading.  The NYSE volume came in under 2 billion shares after three days above it.  Let’s get to the analysis…

The market failed to generate much buying on Friday, even though the Dow has been down everyday but one since the Last Record High on February 20th.  In seven days the Dow has dropped a total of 672.54 points closing price to closing price.  The last time the Dow was lower than Friday’s close was on November 10th.  The market has managed to wipe out nearly four months of upside in about a week.

As we write this evening, there is another Asian market problem tonight with Japan down over 2.5% and Hong Kong down almost 3%.  The US futures markets are down in sympathy but they are down less than 1%.  In any event, we expect at least the US market to start off on a negative path.  

We need to mention a couple of things this evening with regard to this market.  The first thing is that the world thinks this “dip” is just another buying opportunity.  In fact, on the cover of Barron’s this week is a Bull and a Bear and a title of “Stick With the Bull”.  We think the “Bull” is not an animal but more something to do with what a bull produces and they left off a part of the last word.  But, this is a family show we are running here so let’s not try to second guess Barron’s.

We don’t think this is a time to get too cute with our investments.  We talked about the end of the first wave on Thursday and that could be the case but there are no guarantees.  The complacency in the market had a rude awaking last week and the market hasn’t found a place to land for a brief respite.  The market topped less than two weeks ago and this is Not the end of the correction.  There is a long ways to go on the downside.  While the possibility exists for violent upside moves, these should be used to reduce your stock exposure.

For those of you who have been reading this blog for a while, there should be no surprise to the events of the last week.  Maybe the move did give you a wake up call, too, and we hope you answered that call if you haven’t been out already.  

We are recommending a zero exposure to stocks.  The safest asset is cash and we hope you have considered it.  For aggressive traders, this is the time to look at some of the opportunities in the RYDEX funds that we list every day in the table below.  Any of them that start with RY… are RYDEX funds and some of them are leveraged and others are not.  Please check the prospectus for further information.  Use caution when investing and feel free to ask questions in the comments.

Normally, we give you a list of the upcoming news items for the week:
February ISM non-manufacturing index—Monday
January pending home sales—Tuesday
Fed beige book—Wednesday
And, drum roll please…
The February job’s report—Friday

We hardly believe any of this matters this week due to the market’s new direction except that any news could help “grease the skids”.

We encourage any questions/comments in the comment section.  
Dow Industrials:  12,114.10  -120.24
VIX: 18.61
HUI:  323.29  
QQQQ:  42.48
RYVNX:   18.00 (we own)
RYAIX:  22.14
RYCWX:  37.82 (we own)
TLT:  90.20
BEGBX:  13.87

Thursday, March 01, 2007

Just Another 2 Billion Share Day

Market Action:
When most people see the news about Thursday’s market they will hear that the Dow was down a modest 34 points.  While that is true, the market experienced another violent day.  The Dow started the day with a 200 point loss.  You might ask what caused that violence and the answer would be somewhat difficult to explain.  The news on the surface was that some inflation news attended the Personal income and spending report out just before the market opened.  Another reason was cited to be yet another round of declining global stock markets started by none other than China, again.

Whatever the cause, it seemed to give the market some confidence that the “bottom” was in and buyers rushed in.  A half an hour into the session, the ISM manufacturing index came in above expectations and above the magic 50 line meaning there is some expansion built into the index.  This news lit a fire under the already moving Dow and pushed it up so that it was only down about 65 on the day.  Over the rest of the day, some additional strength came in and put the index into the green for a while but it couldn’t hold and ended 34 points lower.

After the closing bell, DELL reported some unhappy news about its earnings.  The company failed to match expected and we might add reduced earnings and revenue numbers.  DELL fell a little in after hours trading, but not much.  

In other earnings news, GM is not going to produce financials this week.  GM is the owner of GMAC and an owner of Ditech, both of which are heavily into subprime mortgage lending.  But, as long as we don’t have to look at the cold hard truth, we can ignore it.

Just some quick comments this evening:  First, the Dow seems to have completed its first down move with the early morning sell off.  So, from top (~12,800) to bottom (~12,060) there has been a drop of about 740 points.  This number should five us some information about the next couple of moves.  

We should see a bounce that will take us back up roughly 38% to 62% of the way down, or from 280 to 460 points higher.  That would take the Dow up to a range of from 12,340 to 12,520.  Thursday’s rally made it back to 12,290 so there is some room to move up before this correction (rally move) is complete.  

The next move after we get back up to the end of the corrective phase will be down and probably strongly down.  We should see about a 162% drop, at a minimum, of the first wave down, that would be about 1200 points or near 11,300 if the eventual second wave top comes in around 12,500.

We will explain more about this move over the next few weeks.  This week was just a preview of the selling we should see.  

The volume in the stock market was high again on Thursday, above 2 billion shares on the NYSE.  That makes three days in a row with volume over 2 billion shares.  This market has turned and this wave of buyers is in for a rude awakening.

Any rally attempts over the next few days should be used as opportunities to sell.  

Cash is back in the driver’s seat.

Dow Industrials:  12,234.34  -34.29
VIX: 15.82
HUI:  334.35
QQQQ:  43.13
RYVNX:   17.44
RYAIX:  21.78
RYCWX:  37.05
TLT:  89.74
BEGBX:  13.87