Thursday, May 29, 2008

Friday Ramblings

Top Line: As we expected in our last post, the stock market wanted to go up a little further. Thursday was the day for that rally. Now that it has happened, there can be some trading that tries to keep the prices at this level for at least a little while. Still, the next big move is Down.

As the market closed, DELL, in the form of Michael Dell, announced that they had a pretty good quarter especially for their overseas business. The stock itself enjoyed a good up move after that news and may actually spur the broader market in the morning. Why, as in why would the broad market go up because of DELL's announcement? Well, of course, any time a stock does a little better, it is a complete global event and this good news extends to all stocks. Yes, the opposite is a little different. For Bad news, the only stock that gets dumped on is the one that announces the news, as in, it's an isolated event and company specific. Ok, this is a little useless, let's get to some better Friday topics...

The possibility of the rally finding a top is in a short countdown. We think the date will be sometime between now and the jobs' report which comes out next week. It's a simple philosophy but we need to keep our eye on the situation just in case.

One of the items that we consider most every day as we have for a long while is the housing market or the mortgage market. You probably are getting tired of all of it both reading it here and actually living it. But, when we do hear some good thinking on the subject we like to share it with you. Yes, we have a bias on the subject but if there really is a good idea/argument on the other side we would present that here, too. Yes, we would.

Anyway, the news this year is all about distracting people from any difficulties. The problem is that the analysis is weak. We think the housing market has a long way to go before the Bottom occurs. Then, even more time will be required before the prices rise much again. Why is this?

Let's finally get to this...The environment for buying a house is complicated right now because of the way it used to be. Now we have a much different situation. The real estate market used to be dominated by speculators on the buy side. Now, those speculators are on the sell side with a few losses to deal with. These speculators may have turned over their houses to the mortgage holder. The mortgage holder does not want to be a real estate investor so they are sellers, too.

Here is the item we have been holding off until now...The buyers are having a little trouble getting a loan. Banks are trying to get a better borrower by requiring more down payments and squeaky clean credit. These are two big reasons in order to understand the weakness in the housing market. If interest rates would go up much at all, the payment to buy a similar Priced house must be higher with the higher interest rate.

FSI: 96.04 (still a little lower than May 12th but speculation is hot, vix is down)

Wednesday, May 28, 2008

Early Again

Top Line: That was truly disappointing and means that there probably is still some more upside in this rally. How much? Well, our guess is more about time than distance. We talked about the jobs' report out a week from Friday.

We are going to just have to wait until tomorrow to see if the market wants to surprise us to the downside, or maybe the next day. Remember, surprises will come to the downside in this phase of the market. In fact this next down spike will most likely be sharp and not easy to trade unless you are on board early, like now or say the next day.

The most we can say this evening is that the market gave us a tease this morning as it opened higher just when we expected it would. As we normally see, when the market is ready to change directions the opening trade gives us the best opportunity. Then there was the nice drop from the early highs but then there was that moment when the market couldn't go down anymore. That's when we saw the move back up which was definitely not wanted and we knew that our idea was early Again.

FSI: 94.50 (yes, it's up again but not up to last week's level)

Tuesday, May 27, 2008

Perfectly Dangerous Rally

Top Line: The stock market advanced, apparently due to the drop in oil prices. So, there you go, the market gives you a nice gift of a rally And XOM goes down along with oil. This is just the scenario that we envisioned in yesterday's post--we didn't connect the two but the market figured out that the two had to be connected. We are now expecting the market to have some trouble and then go down with a vengeance--timing is very soon.

The reason the Dow didn't go up as much as the NASDAQ is that there are some big oil companies in the Dow that failed to participate in the rally. But, the world is so much better off now that the price of oil has gone down $3 (yes, sarcasm is alive and well here at the Update). The market doesn't understand what is going on but that works to your advantage.

The position of the averages sets us up for a potential, as they say, non-linear move. That means that the market could drop and not in a rational fashion. A rally like we saw today (Tuesday) will not have any staying power based on where it will take us. There isn't enough for it to get up to challenge the drop we've had since last Monday when the Dow headed up to 13,100. Today's close was 12,548. That's a long ways from 13,100 especially after a day like today.

In fact the rally was shaped just like any corrective move, three waves with one up and then two down and then three up with the third looking a lot like the first. By the looks of that shape, we could see the turn down as early as tomorrow morning (Wednesday). This is a very dangerous look down.

We'll leave you with that because we want to focus on the market. News does Not matter at the moment. But, of course, we never think it does but it fills the time for the financial news media. Oh, and it creates good opportunities for us to take advantage of.

FSI: 93.52 (good sized up move but still will fail)

Monday, May 26, 2008

Downtrend Getting Underway

Top Line: The stock market had a difficult week last week. Normally, the trading days before a long holiday weekend brings some buying. With any rally at all as we go into month end, we think these will be excellent times to sell and we probably will.

This market showed a strong down move last week and the upcoming week is the last week of the month, a typically bullish period. We like to think the jobs' report is the "first of the month" which is normally the first Friday of the month. This report sort of marks the area where the turns occur. This day is a ways off but we mention it because we think the next two weeks hold the potential for not being typically bullish.

There is a chance for a very short lived rally that takes shape over the next few days just because the selloff last week brought some sellers out. This usually means that the buyers think that all the sellers are gone. We do not think that is true but these things tend to generate rallies. As we go further down from here, these rallies will become fewer and fewer until they cease. This will bring us a Real selling climax--which we will probably want to buy. But, that's a ways off for now.

We want to bring up the oil complex for just a minute. With XOM (Exxon Mobil) dropping from its 96 high on Wednesday to its closing price under 91 on Friday, we think the possibility of the oil having peaked is becoming more a reality. Like we said last week, though, calling the high for a commodity that has been hitting all time new price highs is a low probability event. Our "tell" seems to be XOM and that 96 high from last week. That barrier should hold firm and if it doesn't, our call for a top in oil will be challenged. Until then, we will consider the entire commodity sector in failure mode with prices dropping for a while. Gold broke down before oil and now the two of them should get in sync on the downside.

The previous paragraph goes hand in hand with the value of the dollar. We seem to think that everyone in the world "knows" the dollar is going to go down. This seems like an easy time for the "contrarian" to say that the dollar should now be headed up. The dollar going in the opposite direction of oil, and gold, would fit with the setup from the last paragraph...the dollar should now go up against most foreign currencies.

We'll see how the trading day goes on Tuesday and report in again tomorrow. We hope you had a safe and happy holiday weekend. Nice to have you back...

FSI: 90.87 (not much change here indicates complacency and speculation at the same time)

Thursday, May 22, 2008

Dull Upside Action

Top Line: The stock market eked out a small gain on Thursday, not much in the way of a rebound given the steep declines seen since Monday. With 12,750 Above us, the market will have a lot of difficulty getting back above that level. The path of least resistance should continue to be in the Southerly direction.

In our last post, we spent a little time reviewing XOM (Exxon Mobil) saying that the outside down day after an all time new high should nail the top. Today the stock was down again and today oil was down, too. These two entities should now be ready to go down in tandem. We have thought that the current run up in gas prices has to do more with the Memorial Day holiday than with actual Demand for gas. While that position could be challenged easily, we still think the price of oil has finally topped and the rest of the commodities are going to go down together.

Today, Bill Gross, aka the bond king, gave us his version of what's important, inflation. He's always a good read so we have added his comments here. We are not really in the inflation camp at the moment due to the current social mood on credit. We think the citizens of the US feel almost cheated by the $600 rebate program because food costs so much and then you actually have to pay for gas to get to the grocery store. The days of one upping your neighbor have almost disappeared over night. People are now saying/thinking, "How do they have enough money to buy that car?" not, "If they can buy that new car, I can buy a Hummer." Ok, maybe not that exactly.

The Treasury bond market was down significantly today but it looks worse than it is. Since the bonds are not breaking through the lows set over the past few weeks, so the market seems to be saying the bonds are a short term buy. We might agree, for a few weeks.

The stock market had very little movement today suggesting the buyers may be on strike. We are coming up on a long holiday weekend which will give several people a chance to think about the price of gas in relation to the price of their portfolio. We'll see what happens next week.

Friday brings us the latest read on existing home sales, which remember tends to be a little bit of a lag. Of course, these numbers by themselves do not really make the news anymore, unless the news seems to be positive. The expectation is for a drop in this number which does open up the possibility of a win for the bulls. However, we are now in the period of time when the news and the market will be traveling in the same direction--so, while we predict a negative reaction to whatever the news is, we think the news will not be good either.

With the long weekend, we will not post again until Monday evening which is the evening before the next market day. Have a safe weekend and come back again sometime soon.

FSI: 90.92 (just a little down from yesterday)

Wednesday, May 21, 2008

Below 12,750 and Confirmed by Our Own FSI

Top Line: The stock market gave a signal on Wednesday that the rally we have seen since March is largely over and we are now headed down.

The Dow held tenaciously to the 12,750 level until two hours before the close when it just gave up. Yes, there was news about oil and news about the Fed's perspective on the economy and inflation but the point is that the Market decided to sell off.

The news items of the past couple of months did not match up with the idea that the market was going up. This is to the consternation of the public who thinks the media "knows" what the market is all about. So, when the news is "bad", the market should go down. It wasn't. Well, that's about to change. The news will now continue to be bad and the selling will actually match up with the news. Things will be bad but at least the market will make more sense.

This position of the market gives us the perfect picture of a coming drop that should take us down to the March lows if not more than that. We will figure that out later. Right now we are going to follow the downtrend to see where it will take us.

The oil news matches up with our assessment on XOM (Exxon Mobil). The thinking is that the price of XOM would not follow the price of oil up and that would be a big clue that the oil price is just about ready to drop. Well, Wednesday XOM was up to an all time new high but it suffered a price reversal normally called an outside down day. What's that?

An outside down day is when trading in a stock or an index goes up higher than the high on the day before and then goes down (reversal) to close below the low of the day before. So, XOM traded in a range of 93.93 to 94.88 on Tuesday and then on Wednesday it went up to that all time new high of 96.12 before falling to close at 93.67. The high today was 96.12 which is higher than yesterday's 94.88 and then the close of 93.67 was lower than yesterday's low of 93.93.

Of course, we are talking about a stock that just traded at an all time high so the odds are pretty low that we are correct in calling a high right here but we are calling a high right here. With no one losing money on this stock except a few who bought today and yesterday, there is no reason to sell...or is there?

We saw the price of gas jump 25 cents here today (Minneapolis) and we still think it has to do with the Memorial Day holiday being right around the corner. That, and the fact that oil hit an all time high today. We do think the price of energy is near or at its peak, too, based almost solely on the price of XOM not confirming the price of oil today. Bold, but that is what the market has indicated. Tomorrow may bring something new for us to consider but who knows better than the market? CNBC???

The stock that is leading the market down seems to be none other than AIG. Today, AIG fell to a ten year low price and is now just under 37. Hank Greenberg seems to be in the news again, too, on possible SEC charges.

Then there is the story about the Prudent Bear fund and its managers on Bloomberg which we thought we should share. We are particularly interested in what Doug Noland has to say in his Credit Bubble Bulletin, published most Friday evenings, which can be found on the Prudent Bear link to the left.

There is some confirmation of a high now that the FSI has failed to make it back to its old highs even though the media thinks the worst is behind us. Today the FSI fell 4.5% with all four components down.

For those of you who don't know, our FSI is based on the Four Horsemen popularized by the TV personality Jim Cramer last year. The four stocks are Google (GOOG), Apple (AAPL), Amazon (AMZN), and Research in Motion (RIMM). We use the prices of these four stocks to form the basis of the FSI which stands for Fo(u)r Speculation Index. We solicited names for the index late last year and ended up picking this one because it seemed to sum up the way we thought the market was treating these stocks at the time.

FSI: 91.22 (important reversal)

Tuesday, May 20, 2008

Surprising Downside Followthru

Top Line: Monday's key reversal carried into Tuesday's trading causing the stock market to drop about 1%. By the end of the day the Dow was down just about 200 points. This move seems to be the Right direction but we are still waiting for full confirmation...soon.

One of the news items that "caused" the downturn, according to the Main Stream Media, was the PPI (producer price index) core rate which came in at a greater than expected 0.4% for the month of April.

The report from CNN Money actually included a lot of info about the market in general. There is a paragraph talking about AIG's larger than expected issue of stock and debt of $20 billion compared to the previously announced $12.5 billion. The article also has a link to another report specifically related to the "Wholesale Inflation" rate, which is what the PPI really is, inflation at the wholesale level. The CPI is inflation at the Consumer level, hence the name Consumer Price Index.

We would like to mention the little tidbit about "core" rate, again. Food and energy were the odd participants in the index this month, with food unchanged and energy down a bit. Of course, this is at the wholesale level so maybe you didn't experience the same results at the gas pump or shopping for groceries. But, so it goes...

The main issue, as has been the case for the last week or two, is the stock market's attempt at putting in a high. The last few days of trading give us a better idea that the market wants to go down. Tuesday's trading showed us that banks can still go down and oil can still go up. We are not surprised by either event but will be interested in trading over the next few days.

Our take continues to be that the market should make a high here in May, one that is lower than the October high. We did notice that the Dow Transportation index did make a new high, during the past day or two, this in spite of the level of oil. These are the things that make people scratch their heads as an industry that depends on oil is going up to new highs???

The market is ready to go down and the reversal we saw starting on Monday is one that we should not ignore. This is the way a top looks, up early in the day and a surprise selloff into the close. That is exactly what we got on Monday, even though the Dow did not go negative.

As the FSI shows, there is still plenty of speculation:

FSI: 95.54 (AMZN was the lone component down on Tuesday)

Monday, May 19, 2008

Key Reversal Day

Top Line: The stock market saw an intraday reversal that, in the NASDAQ 100 (NDX) at least, creates a very bearish picture indeed. We see the Dow did Not reverse into negative territory but that is also not a bad sign for bears.

We have been a little uncomfortable that the NASDAQ indexes were stronger than the Dow but on Monday that changed a little. With the Dow staying positive and above 13K at the same time the NASDAQ was reversing early gains into losses, the picture is becoming more and more focused for us.

The Dow is the main index the public pays attention to and Monday gives everyone a little warm fuzzy feeling being above that magic? 13K line. Meanwhile the world was collapsing around the Dow as the NDX reversed from a high of 2050 (closing an open gap from earlier) to a trading low of 2005 before closing around 2016.

Fleck tells us that the main trigger may have been one of the techs, SanDisk, SNDK, making a poor announcement. They were a little disturbed by the price of oil because it was cutting into their profit...but did they mention that the business they are in, flash, is suffering price declines? No, we didn't think so.

As for the Horsemen, they had a rough afternoon, except for AMZN which posted enough gains to benefit our little index. Otherwise all of these four stocks reversed into the close with AMZN the only one up on the day.

Here we are again, late in the evening...too many things going on this evening to get a good Update post up. We'll try again tomorrow. In short, be out, as in, in cash. OK?

FSI: 95.27 (not down much but Down)

Sunday, May 18, 2008

No Direction

Top Line: The market continues to float up in the clouds. As we sit here and wait, the market wants to extract as much pain as possible. There is some room to go on the upside if it wants to but we still don't think there can be much left.

The evening is again late and we have very little to say. We do have two items for you to read and they are simply to show you where the main stream media has finally come...over to what we have been saying for quite a while. (That should scare us a little...)

The first article comes from Gretchen Morgenson and the New York Times. It centers on how the Fed has entered an area that should not give confidence that the worst is behind us. That is the area of buying less than quality assets in exchange for cash.

The other article gets at what we have said about the consumer and the residential real estate market putting a drag on the full economy. And, while this article doesn't mention the global economy, there is another one that does.

Gold made a nice jump late last week, jumping about $40 in two days. We don't think this amounts to more than a retracement of some of the recent drop. This has corresponded to the jump in oil prices which will find a high in here somewhere. We still think XOM is going to be the best way to watch this develop. This includes the move in gold, which we think will head down again soon. The Dollar had fallen in the last few sessions but we think that is about to turn around, too.

Going back to oil, the government suggested it would stop its current build of the SPR (Strategic Petroleum Reserve) amid criticism that it has caused part of the price rise in oil. Since the government has been purchasing about 40% of our imports, that is not a bad assessment, as we see it.

FSI: 95.60 (mixed bag along with the broad market on Friday)

Thursday, May 15, 2008

Bears Have Vanished

Top Line: As the market opened there was a pause when everyone seemed to look around and say there are aren't any sellers around. From there it was up and away with a giant move. We are ok, for now at least, with our short position. Why? Well...

Since you asked, we think the evacuation of all bears from the floor has left us very lonely. This is a place we kind of like to be. What do you expect from a contrarian? And, with that we need to say, we have our limits but the rally is nearly over. How do we Know? We don't but the evidence is still there and the volume is still low and the NASDAQ is outrunning the Dow. Don't forget that our FSI has now stalled, too.

These facts are pretty strong given you go back and read the earlier posts from the past few days.

Let's get specific. We are getting pretty interested in the oil patch. Oil has the potential to find a Top around here, $125. If we keep our eye on both the price of oil and the main oil stock index USO. Plus, we are watching XOM (Exxon Mobil) for possible ideas. We think the price of XOM is a big clue to what will happen to the price of oil.

Right now the price of XOM has tried to get back to the highs of April--so far it has not made it but we can wait. Lot's of downside is possible. We are taking our cue from gold which has started its descent, leading All commodities lower.

FSI: 95.90 (failed to make a new high)

Wednesday, May 14, 2008

More Confirmation of a High

Top Line: The market gave us another signal that the rally is about over with its significant reversal late in the day. We might even say that Wednesday's highs will not be exceeded but that would mean the market would have to go up again to prove the Update wrong...

The market jumped out the blocks on Wednesday morning because, according to main stream media, the CPI numbers came in better than expected. We don't agree with either the CPI or that it was the reason for the rally. That doesn't matter anyway since at the end of the day the market closed lower than it started. Wednesday's reversal signals to us that the market is ready to continue its journey South.

The stock market looks ripe for a fall and, this being the Wednesday of options' week, we are not surprised to see a bit of a turn around. The best thing we can say is that the signs point to a major downturn right now and that's what we want you to keep your eye on.

In our last post we discussed the 200 day moving average barrier for stocks right now and we also mentioned the divergence of the NASDAQ and the Dow. It seems that this happened last fall when we started this drop. The NASDAQ did make a higher high in late October while the Dow did not setting up the same type of divergence that is going on right now. Too many bearish signs to ignore and we choose to be short--yes, we were a little early a couple of weeks ago but price-wise, there isn't much difference.

One other item is the Fibonacci retracement of the drop from the October highs. Looking at our favorite index the NDX, NASDAQ 100, we see that it peaked close to 2240 and fell to a low of about 1670 or 570 points. If you take a nice 0.618 Fibonacci ratio (golden ratio) to be the retracement percentage you get about 350 points ( 570 * 0.618= 352 ). This is a normal bounce and if you add the 350 to the 1670, you get 2020. Now, ask yourself this question, "What was the trading high in the NDX on Wednesday?" The answer is 2028 which is very close to the projected level of 2020.

FSI: 94.71 (All horsemen were down today after the big burst out of the blocks this morning)

Tuesday, May 13, 2008

Divergence in the Indexes

Top Line: Our thought on the market is that we are in a rare technical position (see our last post) that should lead to a dramatic drop in prices. These may be the best prices for the rest of the year.

One of the market's biggest problems at the moment is the volume. Yes, the market recovered much of today's early decline but this heroic effort was done on low volume. For most of this rally off the lows of March the volume has been anemic. Maybe it's just spring fever?

We are going to stay with our analysis of the current position of the market. To continue with the reasoning from our last post, the probability is high that the market is heading down due to the flattened 200 day moving average. But, not all the signs are bearish, at least not yet. The market always needs to keep people guessing, as long as possible.

The main problems with our theory rests in the divergence of the NASDAQ indexes and the Dow and SP500. In the past few weeks the Dow has sunk from the recent highs around 13,100 to the 12,750 level. At the same time the NDX, the NASDAQ 100, our favorite index, has managed to put up a higher close. The divergence is important because of the more speculative juices exhibited over in the NASDAQ. You know about our own index, the FSI, and how it is telling us that the rally may well be over. Yes, you have to listen carefully, we know...

The divergence is probably just a distraction but since it is out in the open, we are going to watch this closely. We would say that the market has tried to extend the rally but it is labored at best. The week should provide some additional clues. This week is options expiration and may find a reason to trade down based on that alone. Otherwise, there are some news items that could make a difference but we don't think so. The market is pretending to be bulletproof at the moment. That should change very shortly.

FSI: 95.98 (just a little bit of slippage)

Monday, May 12, 2008

12,750 Appears Again

Top Line: Another up day on Monday gives the bulls something to crow about but we think it's more opportunity for us to sell. These opportunities will not last too long.

Before we get to the meat of the post, we thought we would remind you of our old friend Dow 12,750. If you take a moment to go to BigCharts via the link to the left, use the symbol INDU and look at a two year period, or start with a six month period. Either way, take a look at the level of 12,750 and notice the way the Dow has flirted with this level over this time period, especially in the last six months. By the way, use your back bottom to come back here when you're finished...ok, please come back, the rest is interesting, too. The point of this exercise is the significance of the 12,750. Ok, back to the Meat...

After reading last night's post, we came to the conclusion that we left a couple of details out and we will try to fill them in over the next few days but tonight we need to reflect on the technical position of the major indexes. The market is in one of those rare positions that gives a good risk reward profile. This situation is the most bearish we have seen in several years.

This is Technical Trading 101 and one of the most fundamental principles there is. The pattern is based on the 200 day moving average. As the 200 day moving average is moving up, it is usually "safe" and profitable to own the underlying asset. Sometimes the asset gets a little too far away from the 200 day average that it is pulling in that direction. At that time exhaustion can set in and the price can cut back through the 200 day line. This action alone can flatten out the 200 day average.

When the 200 day flattens out, the stock normally will try to move back to it. At this time, which is now, the asset will normally move back. Specifically, we should talk about the situation that we find ourselves in, that being the asset price Under the flat 200 day average which had been rising for a while.

The implication this pattern is giving us is one that needs to be heeded. The essential concept is that this will be a failure driven by the owners of the stock that do not want to lose more money. Whether they bought at the October high or at some point other than that, the October high is what they are hoping to achieve again. It's like a Mistake they made, not selling at The top. If Only the stock gets back to its highs I'll sell, they say. What really would happen if the stock topped the old high would be that the owners would now find a new Mistake point.

But, here they find themselves smack dab in the middle of a large failed rally. The flattening of the 200 day line represents the collective opinion of the owners of the stock. When the price falls from that flat line, this will be the point where there will be recognition of a large number of owners that it is now time to get out. More tomorrow...

FSI: 96.10 (pretty strong showing from the Horsemen)

Sunday, May 11, 2008

Bearish Signs Are Emerging

Top Line: Friday's market...uh, what happened? Oh yes, even though it seems a long time ago, the AIG news did give the market a little trouble with the Dow dropping just about 150 out of the blocks. From there, the market couldn't get up enough energy to do anything as we went out of the day very close to where we began, at least in the Dow. Some of the other indexes did fare a little better by the end of the day but Friday still ended down. This direction is the one we would continue to think is the right direction.

We only have a few things to share with you this evening starting with an article out of the New York Times which has the potential to hit at the core of the issues we focus on here at the Update. But, of course, it doesn't quite measure up in the end. The discussion includes references to Fleck as well as James Grant, two guys who at least are thinkers. In this article they are somewhat taken out of context but here's what we think.

The article is trying to get at the influence of the Fed and when it should be exerted. The argument taken is that there have been those who say just let the economy go and let the chips fall where they may. Taken at face value these statements seem cruel to someone who is having trouble making ends meet. Here we have someone who thinks the government or the Fed should bail out the people who are in trouble.

Our thought is that nothing is simple but the answer can Not always be to try to increase credit and put many people in debt. In the short run, this has been the answer to put off the day of reckoning until a another time. But, here we are at "another time" and we may not be able to put it off again. We have said the Fed and the government will be powerless to defend against what we are about to experience. They have to try but they will most likely fail. The biggest question is, "what then?"

What this article is trying to say is that we can't let "what then?" happen and the Fed needs to do what it can to "fix" the problem. Well, we think the same answer can not be used again, with good results. It's sort of like using antibiotics a few times and the drug is ineffective at some point. That's where we are now. And, of course, there are no good answers at the moment. The best answers were for the Fed to have let off the gas a little and let a few little recessions happen along the way. We have another analogy, which you are probably getting tired of by now with two now in the same paragraph. That analogy is it's like the economy is trying to take a breath and another breath without exhaling. Finally, it will just have to exhale Big. With little exhales in normaly breathing, things go smoother.

The other items relates to the technical picture for the market. We see that the 13,000 level was exceeded for a few days but has not been able to hold. This is very bearish especially when considered against a couple of other technical factors. We mention one here tonight, that being the volatility indexes, VXO and VIX. These have been mentioned in the Update on occasion in the past as being good contrarian indicators, you might think we actually like that.

If you look at one or both of these, you will see that back in October,near the peak in the market, these indexes were trading at higher prices than at prior times. That was one clue that the October highs would not hold. If you look at the prices of these indexes Now, you will see that they are very near there October lows. We think, and two of our reads this weekend do too, that the complacency indicated by these two indexes when stocks are no where near where they were in October is a confirmation that the market is about to sell off in a big way.

FSI: 93.40 (down in line with the major indexes)

Thursday, May 08, 2008

Not a Wednesday Update After All

[Editor's Note: On Wednesday evening we experienced a hardware/internet problem and were not able to post anything. We apologize for not having an Update yesterday. Thanks for coming back to check.]

Top Line: Wednesday did give the bearish position a bit of a boost and we do think the best of the rally is behind us. In fact, we think the market will stay below the highs generated this past week in all the major indexes. Thursday's action was mostly an attempt to rally them, an attempt that failed.

As the market closed, a familiar company announced earnings that were a bit of a disappointment. You guessed it, AIG disappointed with a $7.8 billion loss. AIG has been a stock that has led the market down in the past and it could easily be the leader to the downside now. Today's (Thursday's) trading was not kind to the company although it did recover a little by the end of after hours trading. AIG was down in the market's "corrective rally" day and then down more in after hours, about 10% in total.

AIG tried to smooth things over with investors by raising their dividend 10% which seems a little, for lack of a better word, questionable. Here the company is going to have to raise capital somehow and meanwhile they are raising the dividend to current shareholders. Questionable...

The other news of the day was from the US Treasury market which took its lead from the oil patch with both going up on the day. There's a strange pair of events. The article says that the US Treasury bonds rallied because of the increase in the price of oil??? The twisted logic (TTL) this evening is the higher oil prices brought up the threat of inflation and stock investors don't like inflation so instead of buying stocks (which were up, too, by the way) they bought US Treasury bonds in a flight to safety. Who can write this stuff?!? Whoever did forgot to put their name on the article--no kidding.

The most probable conclusion here is that Oil should not be going up. The dollar is rising, the bonds are rising and the stock market is about to fall again. The missing picture is that oil should be going down. Stocks and oil have been riding together for a long time, five years, corresponding to the war effort.

Our thought for the day is that the market is going to be having more and more trouble holding up. AIG gave sufficient fodder for the market to chew on tonight. Still, the overnight futures didn't seem to drop too much but there is a definite undertow this evening. AIG is a Dow component and after dropping about 3 points this evening, that would start the Dow off the day with nearly a 30 point loss on Friday. Probably more to come...

FSI: 94.39 (after yesterday's 93.69--this indicator is flashing red in a big way)

Tuesday, May 06, 2008

FSI Shows Early Signs of Weakness

Top Line: The bulls don't want to let the market go down. Tuesday morning's news from Fannie Mae (FNM) did generate some consternation but in the end FNM was up...more about that later. The market rallied after clearing the "problems" out of the way with about five minutes of trading. We do Not think that it is enough...more selling to come over the next few months.

After the market closed, CSCO announced earnings that, combined with their forecast, good enough and the stock rallied about 1%. We'll see what the morning brings.

Here are the headlines from today:

Oil Likely to Reach $150 to $200

Fannie Mae to Raise $6 Billion After Posting Loss

GE to Stop Financing Boat, Motor Home Purchases

Legg Mason Hit By First Loss in 25 Years (Legg Mason is a fund manager)

DR Horton Swings to $1.3 Billion Loss (DHI is a homebuilder)

There may have been some more bullish headlines but these are not normally thought of as bullish. Well, at least not to us. But, in the crazy world of high finance, the bad news is "now behind us" so it must be onward and upward.

We're really not that concerned with a day like Tuesday, it is simply a natural reaction to being sold early. There really is no where to go but up, on the day anyway. The news from FNM was sold in the morning and FNM itself took a hit in the early going, down about 2 points (7%). By the end of the session FNM traded up nearly 9%. It must really have been a buy. When you consider they will be able to raise $6 billion to help their capital position, the company must be solid (oh, that sarcasm is back).

Our take on the day is that the last of the bulls wants to own some stock and thought the dip in the morning was for them to buy. These are the same kind of days we saw near the lows, where the sellers came in on up days because "don't you know that the market is going down?"

Again, we are patient. The highs of last Friday morning are somewhat in jeopardy in a couple of the indexes we follow but we do not think a break above them will amount to much. But, we do keep a close eye on those developments because we want to see if there is a divergence in the broader indexes indicating weakness. Our leading index, the FSI, showed some weakness on Tuesday which is a bearish sign.

FSI: 95.25 (down on an up market day, bearish action indeed)

Monday, May 05, 2008

MSFT/YHOO or BAC/CFC, Maybe Not???

Top Line: Stock market action on Monday was dominated primarily by the MSFT/YHOO temporary split up. GOOG was the primary beneficiary as YHOO is now free to mate with that company. Still, YHOO did drop a bit on the news awaiting further interplay with GOOG. Our position remains bearish with the market probably topping back on Friday in sync with the jobs' report.

One other little tidbit was about Countrywide Financial's relationship with Bank of America. In the not so difficult to believe category, BAC seems to be struggling with their decision last summer to acquire CFC. We think it's sort of like homeowners who, after buying their house, realize that the price has dropped and really don't want to make those payments they promised to make so they walk away. Ironic, isn't it? Back in August, BAC was proud of their purchase, proud indeed. See our posts from August entitled "B of A, Superman?" and "Bill, Bill, Bill" for more information.

Monday's market gave us very little in the way of concrete information so we again will hold off on any further analysis until tomorrow. We apologize for the brief posts in the past few weeks...the real job is taking up too much time. We hope to see that abate in the next week or so. Thanks for your patience.

FSI: 96.01 (new relative high with RIMM leading the pack)

Sunday, May 04, 2008

April Job Loss: 20K

Top Line: On Friday, if you can recall that long ago, we heard about the jobs and how we lost only 20K for the month of April. This was apparently what the bulls were looking for early as the Dow jumped out of the blocks. We still noticed that the number was negative and so did the market. We set up some more short positions on Thursday and Friday and only have about 20% left in cash. We could be early but we think the market is still ready to drop any day now.

It is late and there is no good reason to stay up and try to come up with something else to say. The market is tired and needs to stop going up. We want to take full advantage of that as we move into May. The jobs' report marks the end/beginning of the month for us and it seems to be marked with an exclamation point, not what we were expecting at all. More tomorrow...

FSI: 94.34 (speculation lost some ground, predicting a fall in the market)

Thursday, May 01, 2008

Apparently, It Wasn't Time

Top Line: Well, that isn't what we expected. The Dow rallied above the 13K level and now it has an opportunity to prove itself. The bulls are indeed smiling this evening because the news on the Fed is out and known plus earnings are coming in ok according to the market. As usual, we were early on our call for a top. We continue to hold some cash just for this type of outcome.

If this level can hold, then the Dow has a little leeway to run but we don't expect there is much left to this upside. The FSI certainly had a good day today with all four stocks up on the day.

The big news coming on Friday morning is the jobs' report which still is expected to show about 75K loss in jobs for April. This number should be a non-event at that level but could be market moving with any noticeable distance from that number. That is not to say that we know what direction that might be but there could be a move if expectations are not met. Wow, there's some good analysis for you. With the stock rally today, we don't feel qualified to be making calls on the direction of stocks for tomorrow morning.

But, we are pretty confident that no matter what the day to day action is currently, there is a lot of work to do on the downside and we might as well get on with it. This recent up move has been labored at best even with a day like we had today (Thursday) where the Dow pops almost 1.5%. When you put it that way, it really doesn't seem very much at all plus it was on meager volume. Yes, and NASDAQ was up almost 3% so that is more significant.

We have been expecting a drop in the commodities and a rally in the dollar. With that thinking, we have considered the impact the oil stocks have had on the indexes in the past, well, a long time. We have thought that the fall in the gold would be felt over in the oil patch and that would take down some of the oil stocks, which it has. On a day like today, XOM (Exxon-Mobil)announced earnings and dropped over 3% while the Dow was up. But, that is one reason that the Dow didn't move up as much as the NASDAQ, too many oil/commodity related stocks in the Dow. Chevron and Alcoa are in the Dow and they did not contribute to the up move in the Dow.

In the news, there were a few semi-important items but none that really mattered all that much to trading. We continue to wait for the jobs' report and we'll finally see what they want to do. We leave you with no homework this weekend so enjoy and we'll be back on Sunday evening.

FSI: 95.21 (up strongly so we know speculation is alive and well)