Thursday, May 10, 2007

Down: Day 1

Market Action:
The stock market opened weaker, Tried to rally, but failed in that effort. The Dow dropped about 75 points in the first 15 minutes of trading only to be followed by buyers coming in to rally it. This rally only took the Dow back up a little ways such that the Dow was only down about 30 points an hour into the day.

From there, though, the market felt a little selling pressure and spent the next hour and a half dropping about 100 points. The Dow stabilized for the next few hours but sold off in the last hour to close about on the low of the day.

The reason for the early morning sell off? That would be reports out of some of the retail stores reporting much lower sales than expected, stores like Wal-Mart, JC Penney, and Kohl’s.

Another report on the trade deficit showed a larger increase there than was expected. We remind people (and economists) that the trade deficit is pretty easy to predict. Take the number of real days in the month and compare it to the days in the prior month. The number of days in March was 22 compared with February’s 20. That would be a 10% increase and we don’t know much about anything, except the price of oil is about the same over the period. How much was the increase??? 10.4%

Finally, a trading day that qualifies as not bullish, dare we say bearish, even.

One of the ideas we wanted to mention this week was the phenomenon of the day traders. They are called day traders because the only trade during the day, meaning when the market closes, they have no positions. If someone holds positions overnight, they are called swing traders and normally this is not the preferred strategy among “day traders”.

So, when there is an event of any kind that causes the market to gap down at the open, the day traders have little choice but to buy stocks for an eventual up move. On Thursday we saw something different. There was a wave of selling that came in right after the “day traders” got into their positions. No matter what a day trader needs to get out of whatever position they are in, so they became sellers during the day, too.

You can pretty much figure out where we stand on the market. We think this is a tell tale day that will lead to more selling. The market broke some key support but, yes, there are several more below us since the prices have gotten so high over the past month. We contend that those support areas will be broken.

We realize that Thursday’s move could be a day in the life of a big bull run but we think that this run is now more than just a little tired. Plus, Friday brings us the PPI which the market should be paying very close attention to, since the Fed doesn’t seem too concerned about the slowing economy but they are concerned about inflation. The expectations are for the loaded PPI (you know, the one with all the data included) to be up 0.6% and the PPI lite (the “core” PPI without food and energy, please) is only supposed to be up 0.2%.

We are not concerned about inflation here at the Update but we know the market is suddenly unsure of what is going on. That is where all of this will play out. The market will go down for what seems to be no reason at all, and in our minds that’s just the way it went up.

Gold/Mining Stocks:
Before we close our post this evening, we need to mention the precious metals complex. We have suggested that gold would drop into the $450 range with silver and mining stocks going down as well. Thursday marks a pretty strong break in this complex, with gold dropping about $15, leading us to conclude that the move down in probably official. This move comes in combination of the dollar going up for a while.

The HUI, a gold mining index we follow, dropped to 332 and we think it has the potential to drop another 20%. If this happens, we will have some great opportunities to buy the precious metals complex. Patience, as always.

Dow Industrials: 13,215.13 -147.74 (seriously?)
VIX: 13.60
HUI: 332.04 (down 10.17)
QQQQ: 46.19
QQQRS: 0.47 bid
QQQRT: 0.78 bid
RYVNX: 15.50
RYAIX: 20.64
RYCWX: 32.15
TLT: 88.50
BEGBX: 13.89

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