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)

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