Tuesday, May 15, 2007

Something Different

Market Action:
The “core” CPI, you know the one, without food and energy, was up 0.2% last month, just like we expected in our last post. (By the way, we didn’t guess the number; we expected the number to be the maximum allowable by the market.) With this news the market, having been “worried” about the CPI, turned around before the opening bell so the Dow jumped about 35 points with the other indexes up a bit, too.

From there, the market fell back until about a half hour into the session. (Prepare yourself for some sarcasm.) With the market in need of some good news so it could trade higher, voila, a news item hit the wire that satisfied the bill: Home prices dropped for a third straight quarter. The logic is twisted but, if you have been following the homage paid to the Fed’s ability to move the market higher with its little wave of the interest rate wand, you would no doubt understand that the Fed would be looking at that particular piece of data and resolve to lower rates at its earliest convenience. (It makes so little sense to us.)

That little piece of news vaulted the market higher, nearly 100 points on the Dow inside of about 15 minutes. Then, after a modest pullback, the Dow continued up until it was up about 135 around midday.

At the same time the broader market didn’t quite react the same way. Yes, the broad market moved up powerfully with the housing news but then when it tried to rally after that pull back there was a muted up move that didn’t even get back to that earlier high, except for the SP 500 and the Dow. This was something different than we have seen before. We think different is good.

From the Dow highs of the day, up around 135, there was a slow leak in the market that lasted the rest of the day. The Dow itself managed to stay positive but all the other indexes we follow were down on the day with the NASDAQ Comp and 100 as well as the RUT (Russell 2000) down about 1% on the day.

The stock market staged a dramatic reversal on Tuesday on some heavier volume than we’ve seen for a few weeks. This nascent down move still needs to make more progress in order for it to get some respect but the pattern is in place for a strong down move.

The SP 500 did manage to make a new relative high in the midday rally, along with the Dow, but it reversed just like all of the indexes.

We actually think the Dow closing up on the day, to an all time high, is poetic. We think of it as the general leading the troops to battle and then looking back to see that the soldiers have actually abandoned the fight.

This is options expiration week and with it we normally see some volatility but this week could see more than a normal amount due to the position of the market. The volatility index, VIX, moved up slightly on Tuesday but could move dramatically higher if you look at the chart (see BigCharts link at the left).

There is a new wind blowing across Wall Street and we think it is in the southerly direction.

China Update:
We mentioned China in our last post and note that is traded down about 3.5% after we finished. Apparently, a 3.5% down move is not worthy to mention when we have such good CPI news to enchant the US stock market. This is something to watch very carefully and we plan to add it to our watch list this week—we will report any developments.

Dow Industrials: 13,383.84 +37.06 (another record high)
VIX: 14.01
HUI: 329.39
QQQQ: 46.10
QQQRS: 0.42 bid
QQQRT: 0.73 bid
RYVNX: 15.56
RYAIX: 20.70
RYCWX: 31.38
TLT: 87.93
BEGBX: 13.94

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