Stock Market Shows Some Weakness

Welcome to the weekly post for the Update. We have been going through withdrawal here and do miss the daily version. With the market having difficulty around these prices, daily posts may be back soon. There should be no surprise to those of you who are contrarians, like us, any wavering from that bearish position might result in a pretty solid top—oh, well. But, admit it; you missed the Update, too.

Jobs’ Report:
The May jobs’ report coincided with a new high in the Dow at 13,690.62. On Monday this high was challenged by a high trade of 13,690.21 but failed to improve on the Friday number. From Monday’s high, the Dow fell about 250 points to Wednesday’s low around 13,437.

As you may recall, we think the jobs’ report is the key report for the month for the stock market and maybe the bond market as well. The report came out last Friday after a month long difference of opinion of the bond market and the stock market. The stock market had rallied for most of the month while the bond market fell most of them month.

After the jobs’ report indicated about 157K new jobs, CNN Money proclaimed that “Solid gains in jobs, manufacturing, consumer spending offset weakness in housing; Fed seen on hold” under the title of “Economy hits the sweet spot”. The job gains are “solid” compared with some that have been under 100K but this is not “solid gains in jobs”. But, let’s look at the rest of the headline in light of this week’s news.

Tuesday’s CNN Money late day headline was “Fed rate cuts gone—a hike may be coming”. This headline doesn’t really contradict Friday’s headline but the spin is just a little different. Last Friday the market was doing ok but Tuesday started to leak a little so someone had to come up with a good reason for it.

ECB’s Rate Hike:
On Wednesday morning, in a “widely anticipated” move, the European Central Bank (ECB) raised interest rates a massive quarter point. (Clearly, we still have some sarcasm here at the Update; you missed that, too, didn’t you?) This move was not widely anticipated by market participants as many of the European bourses fell over 1%, some more than 2%. This move prompted players in the US to step back and think (well, ok, maybe they didn’t know what to think about) that maybe the Fed might raise rates, too.

In case you don’t remember, we still stand on the theory that the Fed will Not raise rates anytime soon and will in fact lower them sometime later this year due to the economy being soft ( read that, the stock market is going down to understand the Fed’s motives a little better).

Housing:
The housing market continues to disappoint those that thought maybe the turn was here already but, not to worry, the new forecast is for housing to pick up next year sometime. We wonder if those that decided to buy two or three houses to flip, can wait around for almost another year to see if that recovery happens. From our view of the housing pond, there are no quick fixes that will bring housing out of its downward spiral.

Today’s report from the National Association of Realtors indicated that the US housing market remains “soft” and they would once again lower their forecast for 2007. Meanwhile, they continued their position that prices for existing homes will fall in 2007 for the first time since they have kept records (in the late 1960’s). This group has a stake in a growing home market and is usually upbeat, as sales people need to be. So, they follow up their decline projection with a rise in 2008. There you go, no worries, mate.

Opinion/Analysis:
With the stock market having two significantly down days in a row, we thought this would be a good time to reassess the situation. We suggest that there really was no reason for the decline the last two days and offer that these are the worst kind of days for the bulls. Yes, there was sort of a cool breeze blowing over the hot market, the threat of possibly higher interest rates. But, that has been no threat for this over heated Invincible market.

The stock market may want to bounce of these lows so we are not declaring a bear victory just yet but the seeds have been planted (again). Our indicators fell off a cliff the last two days, not that they all went negative but the change was noticeable. What would be ideal would be if the market told us that it was over by rallying a bit and not getting our indicators back to where they were on Monday. Of course, we still believe in Santa Claus, but he’s not going to be here for another six months.

The market could very easily drop right now and no one would really be surprised. In fact most market analysts would announce that the market was due for a correction and it was healthy and now is a buying opportunity. We would say that you should be extremely careful in this dicey situation. In any event, there isn’t much upside left. The global markets are beginning to get some selling pressure, finally, and they could all go down together which would be a very scary event.

Numbers:
We have decided that while we are writing weekly posts, that the numbers are not going to be reported. As we looked back on the posts to contemplate a new format, the items in our list were not very well known and we didn’t mention them much in the text so you could follow along. There are a few that we do really like and one of them is the VIX, which is the volatility index. The VIX jumped a little on Wednesday to a two month high, showing a little fear among the option players.

Your Input:
If you’re so inclined, please post a comment or check out one of the links to the left. We would be happy to give our opinion or discuss topics of interest to you. All you need to do is mention it in the comments and we will make sure we mention it. You don’t even need to sign your name although you certainly can, if you like.

Take care and we will be back at least by next Wednesday, sooner if conditions in the stock market deteriorate much further.