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)

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