New Home Sales Disappoint

In Friday’s market action, we note that GOOG had its up day after being inducted into the SP500, well, the announcement of induction.  We now await the actual induction day, which should also be greeted by a pop in the price of GOOG, although that would be for the purposes of the SP500 index funds to enter the position.  With the GOOG in the news, there is little else to report of any consequence…wait just a minute, that’s not exactly true.  There is the housing report that we saw on Friday morning, too.

For some reason the market seemed to pay attention to that report, due to the fact that the Market seems to think bad news is good news because bad news means the Fed doesn’t have to continue its string of interest rate hikes.  As you know, this is a fickle market and thinks one way on one day and another on the next.  We wouldn’t pretend to think the market knows much of anything at the moment.  We continue to wait but we are of the notion that the current overbought market needs to let some air out.  Back to the housing report…

The housing report should be a flashing red light to anyone paying attention.  What you see just on the surface is powerful enough.  The 10.5% drop in new home sales was the largest in about ten years.  This idea of trading your existing home in for another existing home is one thing but the fact that Builders are seeing over a 10% drop in home sales should be bone chilling.  These home builders have put up “spec” houses and have been doing it at a fairly nonstop rate for quite a while.  In case you are wondering, like I was a few years back, what a “spec” house is, I thought I’d mention that it is a builder will speculate that a buyer can be found once the house is up, hence the term “spec” house.

Let’s look deeper into the report for more details.  We have been reporting since mid-summer last year that the housing market was rolling over and now the results are in plain view.  If you are reading a paper on Monday morning and there is a piece on the housing report read it carefully to see if you can see these items:

1. New home sales are down 10.5%, most in nine years


2. Inventory of new homes rose to a Record 548,000


3. At current pace, there are enough homes to satisfy demand for 6.3 months


4. AND, The Year over Year median price fell 3%

The median price fell is the key one that most articles do Not want to indicate.  But, October’s median price set the record at $243,900 and now they are below that by 5.5%.  Yes, the price of houses varies from city to city but on a country wide basis prices have Fallen 5.5% for New Homes.  The stock market should be paying strict attention to this because the driver for the economy (besides the government with its never ending red ink) is starting to sputter hard.

In other news on Friday, the durable goods orders were up 2.6% but the report was taken as negative due to the “modified” durable goods report which excludes the “volatile” transportation sector.  The number the market looked at showed a decline of 1.3%.  Again, this report taken along with the housing report, bolstered the market because both reports were weaker than the market expected and therefore…you guessed it, a double whammy on the Fed raising rates forever.  Therefore, buy stocks.

The power lasted for a while but there wasn’t much follow through, for the Dow, at least.  The NASDAQ Comp still is below its 2333 number and we continue to wait for the market to go down due to the over bought condition.  Maybe we will know more this week…in the mean time…

Be Careful out there…

Dow Industrials:  11,279.97  +9.68
RYVNX:   18.78
RYAIX:  22.09
TLT:  89.06
BEGBX:  13.00

GOOG Moves to SP 500

The number we were waiting for on Thursday was the existing home sales and they showed a remarkable increase of 5.2%, surprising most analysts including me.  We thought that, given the whole housing rollover concept, housing sales would have been flat to down.  We need to remember that these sales are a bit of a lagging indicator due to the timing of the purchase.  In most cases, these homes were purchased, not in February, but in January.  The sales are then recorded when the closing occurs.  Since January was such a balmy month as some commentators mentioned, the sales for February benefited from that nice weather, in spite of slightly higher mortgage rates.  We tend to think there was a little spur after the holidays when people had the nice weather to shop for houses and a little extra push to get a mortgage rate before they started going up.  On Friday we get to hear about a more current indicator for housing, the New Home Sales report, and February durable goods orders.  The current consensus for durable goods is up 1.5%.

After an early up move out of the gate, the Dow dropped pretty hard after the first half hour of trading and then traded in a fairly narrow range the rest of the day.  In fact, other than the big reversal on Tuesday, the Dow has basically been in a 50 point trading range for a week and a half.  This sort of dull trading will not last for long and since the Dow is now overbought there will be some downward pressure.

In order to try to convince you otherwise, the news out of the SP500 after the close was that GOOG would be added, finally, to the index.  This move has been long awaited by the market and now it occurs after a 25% break in the stock price.  Well, that news was able to lift the price up nearly ten percent after the market closed.  

Be careful out there…and have a good weekend.  

Dow Industrials:  11,270.29  -47.14
RYVNX:   18.96
RYAIX:  22.20
TLT:  88.44
BEGBX:  12.91

Over Bought Again

Normally, after a day like Tuesday, the market would be down in the morning and then bounce a little for show and then drop into the close but not Wednesday.  On Wednesday, the market opened a bit down and then pretty much rallied all day.  There is pretty much no fear in the market and the bulls seem to be bold.  We talked about the volume on Tuesday’s reversal as being a little light for a key reversal and the bulls noticed it, too, or they didn’t and they just decided to buy the open, who really knows.  The point being that the volume on Wednesday was fairly light on a big up day for the Dow, up over 80 points.  

This reaction to Tuesday’s trading leaves us scratching our heads for Thursday.  Right now, it seems that anything goes.  We do see the potential for a cliff drop on the horizon due to this steady climb the Dow has been on but at the same time, we can’t seem to get anyone to get serious about selling.  

Right now the market is Over Bought and seems to be losing steam but it does seem to go up every day.  We must remind you that the NASDAQ Comp made a double top on Tuesday matching up almost to the penny with the January 11th high.  The 2333 level is now a ceiling of resistance that will be difficult to penetrate—again, not to say it won’t because it can.  As far as the Dow is concerned, it seems that there is a force pushing it up to try to get to the all time high just over 11,700 that occurred back in the year 2000.  Yes, that is six years of No change in the Dow.  And, the bulls continue to believe.  400 points may not seem like much but the Dow can’t go up all by itself for ever.  

The next two days bring us news on the housing and durable goods.  Thursday gives us the Existing Home Sales and Friday the Durable Goods Orders along with the New Home Sales.  Maybe the market won’t care about these numbers but the Wednesday Update certainly does.  This devil may care attitude about stocks will become a dangerous thing very soon.  We prefer the safety of being out and with funds paying around 4% on cash, this isn’t a bad time to be in cash.  Remember the Dow was at this level six years ago so 4% actually seems like a lot.

Be Careful out there…

Dow Industrials:  11,317.43  +81.96
RYVNX:   18.84
RYAIX:  22.12
TLT:  88.72
BEGBX:  13.04

Key Reversal Day

Where do we begin?  The stock market pushed to higher ground on Tuesday morning and hit a wall when the NASDAQ Comp got to that intra-day January high around 2333.  We have been commenting on the closing high near 2331 but the real high is the intra-day.  Today’s high bested that January high by 3 cents before hitting a solid brick wall.  

After that, the market came in quite a bit.  The Comp traded at 2332.95 mid-morning and closed at 2294.23 for nearly a full 40 points move.  By the end of the day the market sported a key reversal by going to a new high in the morning and reversing into the close.  We have another description for that and it is called an outside down day, very bearish trading pattern.  The only thing that was unsatisfying about it was that volume was not very robust so the price moves are not as powerful either, although NASDAQ volume was a little stronger than the NYSE.  But, we did see the highs hold and the reversal unfold.

The PPI (Producer Price Index) fell so hard that there was a mad scramble to focus on the core numbers which the market (and the Fed) wants to do, because that’s what it’s trained to do.  It’s like magic, don’t look over here, look in my other hand.  The PPI was down 1.4% in February for the fastest drop in nearly three years, but not to worry, the core rate was nicely positive at 0.3%, whew.  For a while there, we might have had to face the deflation story, we couldn’t do that, oh no.  

Seriously, the deflation story is going to become large over the course of the next year as both the stock market and the real estate market go down.  We have no reason to discuss this topic at length tonight but the story is getting more difficult to ignore as time goes on.  We are anxiously awaiting the housing numbers that are coming out later in the week.

One of the market drivers for Tuesday was the President’s speech in the morning declaring that the state of the economy and the Iraq war are good.  This propelled the market up a bit this morning and then there was nothing else to hold it up into the afternoon.  The ORCL news and the words of the new Fed head didn’t seem to move the market all that much.

For Tuesday the news is the last thing that is important, what we need to focus on is the important reversal at a critical point.  Our momentum indicators show the market to be overbought but the momentum is fairly weak.  On Tuesday, we saw a major reversal right at the right time and this is important.  

Then after the bell, the market was hit with more news, this time from MSFT (Microsoft) delaying the release of their new Windows Vista operating system.  The NASDAQ after hours market was troubled by this news and fell quite a bit.  Of course, it is overnight trading and the real trading doesn’t begin until Wednesday morning…stay tuned and…

Be careful out there…

Dow Industrials:  11,235.47  -39.06
RYVNX:   18.92
RYAIX:  22.17
TLT:  88.56
BEGBX:  13.02

Another Dull Day at the Office

On Monday, the market heard that the LEI, the leading economic indicators, had fallen a mild 0.2%, very much in line with the 0.3% forecasters had estimated.  One of the problems was that last month’s number was revised downward quite a bit, from up 1.1% to up only 0.5%.  Tuesday brings the PPI and we know what a crowd pleaser that number can be—Not.  The inflation numbers have really not been on the market’s radar screen for quite a while.  What’s on the Wednesday Update radar screen happens to be the housing numbers that are coming out later in the week.  We’ll see if the market can be stirred by these numbers, probably not.

Among other factors at work on Monday was the drop in oil prices of over $2 but not below $60 just yet.  Then, there was the ORCL (Oracle) earnings news after the close which had a negative effect on the price of that stock.  Later in the evening, the new Fed Chairman graced the world with a speech were he basically said he doesn’t know why longer term rates haven’t moved up as the Fed has pushed short rates up, but not to worry, the Fed doesn’t have a problem with the inverted yield curve.

For a Monday the market didn’t seem to have much life in it.  In the early going, the market did manage a little pop but that quickly faded and there was pretty much a flat line across the rest of the day, more or less a yawn of a day.  There is little to report either in economic news or market news.  Yes, the NASDAQ Comp was up a little but there is still a lid on it at 2325; and then there is still the January high of 2331.  This area has brought much resistance to the Comp over the past several months while the Dow has continued higher.  Now, the market is becoming overbought once again without much upside potential, it just appears tired.

By the way, we have re-assessed our thought on the momentum high.  We have said that the momentum high happened back in January.  Well, after looking at it again, we see that the momentum high was back in late November, with price highs occurring now in the Dow.  We think it’s just a matter of time at this point before the market rolls over in a big way.  Don’t be in its way.

Be careful out there…

Dow Industrials:  11,274.53  -5.12
RYVNX:   18.54
RYAIX:  21.94
TLT:  88.99
BEGBX:  13.11

Another Relative High for the Dow

The Dow pushed to another new high on Friday but still left several indexes behind.  It’s true that the SP500 has been able to follow to a new relative high but we are most interested in the NASDAQ 100, the NDX.  This index is the basis for the two Rydex funds we are following at the bottom of each post.  We find it time once again to recommend buying one or both of them due to the market starting to get over bought.  These opportunities may not last for very long but they are here now so we should take advantage of them.

We are fairly convinced that the market will drop into the fall of the year with the nadir, low point, coming in September or October, maybe early November.  I don’t think we have expressed our opinion about how far these indexes can travel but we think a substantial amount.  This fall we will be set up for a good buying opportunity, better than we saw in the fall of 2005, or at least as good.  The point being, this opportunity will come with some value, a quality us contrarians like to embrace.  

So, right now the NASDAQ Comp is trading right at the 2300 level and we expect that by the time October comes, that index will be trading near 1600, or about a 700 point, 30% move.  That would mean the RYVNX would be up about 60%, given its double exposure, and the RYAIX would be up about 30% since it has a single exposure.  Take your pick, either one will be a good choice.

We are also long the TLT, a long dated Treasury bond fund, an ETF (Exchange Traded Fund, meaning it trades during the day, unlike mutual funds, which can only be traded at the close of trading).  The TLT fund offers exceptional value at the moment and comes with a monthly dividend for those of you interested in such things.  So, while you wait for price appreciation, you have the 4.5% yield to keep you warm at night.

Let’s take a quick look at the upcoming couple of weeks.  On Monday, the LEI (Leading Economic Indicators) are due out and the consensus is for a small drop of 0.3% after being up a big 1.1% in January.  Then on Tuesday, the PPI is scheduled for release and the consensus is for a similar 0.3% drop compared to last month’s increase of the same amount.  The read for “Core” PPI, you know the one without food and energy, is expected to come in a little higher, up 0.2% after being up 0.4% in January.  The world is apparently not focused on inflation numbers these days, along with a whole lot of other things (according to “Boston Legal”).  Thursday brings existing home sales and Friday brings durable goods orders and new home sales.  These home sales figures are important to the Wednesday Update (in case you forgot) so we will be focusing on them.  The following week is the much anticipated Fed meeting.

Be careful out there…

Dow Industrials:  11,279.65  +26.41
RYVNX:   18.62
RYAIX:  21.99
TLT:  88.85
BEGBX:  13.12

Big Reversal in the NASDAQ Comp

On Thursday, the market stayed on the course we have been talking about for a while now; only today, the disparity between the indexes was very pronounced. With the entire market opening stronger, it looked like a peachy day for the bulls. About a half hour into the session, the market broke fairly hard except for the Dow, that index dropped a little and then traded in a tight range the rest of the day.

The early morning pre-opening news may have been somewhat influential in the early going with both the CPI and the February housing starts being announced. The CPI was basically a non-event, as it showed no inflation or barely any and was close to expectations at that. The housing starts were expected to be down but they weren’t down nearly as much as forecast. So, here goes the twisted logic once again, ready?

The stock market thought, hey, the housing starts are down so the Fed is less likely to stop raising rates sooner rather than later so the early morning trading was up as usual. Then they started thinking about it and realized that the forecast was for lower housing and much lower than they got so the thinking turned around during the day to, hey maybe the Fed can keep raising rates for a while. Oh my… Realize this is my own twisted thinking on what the market might be thinking, given the fact that is thinking at all.

Friday is options expiration and may get some action due to that. The volume today was a bit higher than it’s been for a couple of weeks, ok, not that much higher. And, come to think of it, the volume has not been very high compared to that during the January momentum highs. We always keep our eyes on such things because all of these technicals can be helpful at times.

Right now, today (Thursday), the NASDAQ market got slammed while the big cap stocks continue to enjoy a bit of a rally. Everyone is excited about the SP500 making new highs the last day or two. We would emphasize that the big cap stocks Should Not be leading this market and of course the NASDAQ was down hard today. In last night’s post, we mentioned the high from two Friday’s ago, 2325, and that the NASDAQ should stay below that level. The Comp went right up to 2323, almost 2324, and fell from there to close just under 2300, a very bearish reversal.

One index we follow closely is the SOX, the Philadelphia Semiconductor Index. Two weeks ago on Thursday, March 2, the SOX traded just over 550. This day, the SOX closed down over 16 points at 496. This index has dropped over ten percent in two weeks. Who is paying attention to that? That would be the Wednesday Update.

Be careful out there…

Have a good weekend and enjoy the basketball tourney.

Dow Industrials: 11,253.24 +43.47
RYVNX: 18.74
RYAIX: 22.05
TLT: 89.12
BEGBX: 13.13

Another Up Day

Not much to say on the evening of the new relative highs in the Dow and the SP500, except that prices are up in these two large cap indexes.  We have seen the market move up for all kinds of reasons that are either justified or rationalized by the market.  We don’t happen to agree with the logic of the market but the large caps have definitely risen in this last week or so, higher than we thought they should or might.

We spent considerable time describing the retracement levels for the NASDAQ Comp and thought a nice level would be somewhere between 2278 and 2296.  Tuesday’s close was nice due to the extreme nature of the move, sort of climactic as it played out.  The closing price was near our 2296 level we talked about several sessions ago.  We preferred ‘the move back to 2296 and maybe a little higher but it should Stay Under the 2325 from last Friday” which was Friday the third of March.  Wednesday the index closed at 2311 and we still think the 2325 will hold.  Time will tell because we have lost some of the other indexes to new relative highs so it’s possible the Comp will move up too.  

We do Not prefer this move back above 2325 in the Comp.  We like it that the large caps, mostly the Dow, have moved to new relative highs and have left these smaller cap indexes behind.  We continue to count on this line of thinking.  In any event, the market’s momentum high seems to be stuck back in January and now it’s simply holding on to the hope.  

Be careful out there…

Dow Industrials:  11,209.77  +58.43
RYVNX:   18.40
RYAIX:  21.85
TLT:  88.32
BEGBX:  13.01

The Ides of March is Upon Us

There are several items to discuss so let’s get to it.  Tuesday brought an enthusiastic market in reaction to several “interest rate” related items.  Late Monday we heard that the Tough Fed may not need to be so tough due to wage pressure not pushing up inflation.  The Fed is now getting ready to be cautious in the future to make sure they don’t overshoot on interest rates.  This happy talk along was instrumental in the up move on Tuesday.  

Add to that, the retail sales fell last month, pulled down by weak auto sales and lower gasoline receipts, lucky us.  The WSJ says that “economists say underlying sales remain relatively strong and they don’t believe consumer spending is slowing.”  But, here again, the bias is for the market to interpret this report as bullish due to a lid being slowly put on interest rates.  In contrast to these reports, we did see that oil has been up sharply in the past two days and that Goldman Sachs had blowout earnings to start the earnings season.  

GOOG was in the news again today, not that I want to mention why, just that it was in the news (go read about it yourself).  The news lathered up some buyers and pushed GOOG up several points, 14 to be exact, in Tuesday’s trading.  You know that GOOG has replaced GM as the market leader—ok, so it’s a little stretch but not much.  

For the Wednesday Update, there were some developments in the index watch.  Tuesday pushed up the Dow to a new recovery high and the SP 500 managed a new high as well.  These two blue chip indexes were the only ones that managed to go to new highs and we caution you to pay attention to this type of technical pattern.  The strongest index we have mentioned is the Russell 2000 (RUT) and it failed to achieve a new high on Tuesday.

The market is faced with some other news in the coming days.  This is an options expiration week, not a quad witch like next month but still a possible force in the market.  Thursday will give us the February CPI and Housing Starts and next week we see PPI, New Home Sales and Durable Goods Orders.  Then the following week we will see the Fed raise interest rates another 25 bps.  The market has managed to get through a lot of difficult news items but the cracks are beginning to show up.  We point to the particularly timid trading volumes and the non-confirmations from the broader indexes while the Dow sets new relative highs.  How are your stocks performing?

These are difficult times and we recommend caution on this “Ides of March”.  We are close to the inflection point so… Be careful out there…

Dow Industrials:  11,151.34  +75.32
RYVNX:   18.69
RYAIX:  22.03
TLT:  88.80
BEGBX:  12.98

The 2/28 Mortgage

Monday brought a nothing day to the stock market.  There was an up bias to the early part of the day but by the end of the day the Dow has lost 32, cents not dollars, big move.  With nothing in particular going on this Monday, the market managed to stay even.  We don’t see how the market continues to manage to hold on to these prices.  Interest rates are seemingly on the rise and the Fed seems bound to raise rates again at this month’s FOMC meeting.  Would it be possible for the Fed to keep raising rates and the Dow to stay flat for the rest of the year?  The answer must be that the market thinks that the Fed will Stop raising rates soon enough and therefore we can’t sell now because there will be a big rally when they stop.  Twisted logic, I agree.

Tonight we focus on the housing market one more time because interest rates have had a minor up tick over the past ten days or so.  The WSJ had an article entitled “At the Doorstep: Millions Are Facing Monthly Squeeze on House Payments”.  According to the online WSJ that I read, this is the top read story of the day.  We thought it fitting to mention it here and you may want to read it for yourself in the print version, if you can find it (page A1).  

The article points out that “many households took advantage of ‘affordability’ mortgage loans—heavily promoted by lenders—that hold down payments for an initial period.”  We would add that the ARM versions were heavily promoted by the former Fed Chairman, Greenspan, in case you forgot his name.  

The article says that about a quarter of all mortgage loans outstanding will come up for interest rate resets in 2006 and 2007, that’s 25%!!!  The article adds that property taxes and energy costs have gone up to squeeze the fragile homeowners as well.  

The article states that 1.4 million households face a jump of 50% or more in their monthly payments when these initial low payment periods run out.  Many homeowners are seeking help in order to find ways to deal with these heavy costs, with many more expected to be seeking help in the future.  

Some of these borrowers will refinance into new 2/28 loans that are set for 2 years and then for the last 28 years can be reset every six months.  “These loans generally limit the size of the first jump to around three percentage points… Monthly payments for a borrower with a loan of about $150,000 would rise to about $1315 from $1000.”  

The last paragraph states that “A common sales pitch for 2/28 loans is that the borrower can use those first two years before the reset to improve his or her credit score and then qualify for a cheaper prime loan. ‘But that goal is rarely realized’…As the housing market cools, it probably will get harder for marginal borrowers to refinance on attractive terms…”

Be careful out there…  


Dow Industrials:  11,076.02  -0.32
RYVNX:   19.33
RYAIX:  22.40
TLT:  88.21
BEGBX:  12.92

Dow Flying Alone

The stock market gets ready to open for another week of trading.  Last Friday, the jobs report seemed to bolster the market a bit with the Dow jumping about a hundred points.  We have said for the last several weeks, most of the year in fact, that the Dow has remained strong while the broader market has not been a part of that move. The closest major index to the Dow is the Russell 2000 which fell from its new highs about a week ago and now has to move quite a bit to catch up to the Dow.  Again, that’s not to say that it won’t catch up, just that it hasn’t so far.  

I think more important to the Wednesday Update is the SOX, the Philadelphia Semi-Conductor Index.  The SOX has fallen in the same time frame as the RUT (Russell 2000) and had kept falling.  Even with Friday’s 100+ point move in the Dow, the SOX was down.  This is a particularly glaring signal that we are paying close attention to.  Our favorite little stock, INTC, has dropped below 20 and the stock is now pushing on support from about two years ago right at this level.  Further selling should be imminent.

We are avoiding the news in our recent posts because the news is what it is but the market is doing what it does best, confuse the most participants it can.  We think that the news serves to confuse even more so we want to pay attention to the market.  Right now and for the past several weeks the Dow has been showing some strength while the broader averages have not followed suit.  This is classic early stages of a downturn.

Be careful out there…

Dow Industrials:  11,076.34  +104.06
RYVNX:   19.45
RYAIX:  22.47
TLT:  88.28
BEGBX:  12.88

Jobs Report Looms

To our way of thinking, Thursday’s market was very weak.  With trading up in the morning on a perfectly reasonable rally day, the market decided not to rally but instead pulled back.  The market has been making signs that it wants to go down and you have read about some of those signs in these posts recently.  The primary sign was the Dow being strong while the broader indexes did not participate very well.  

Last Friday the Dow put in a fairly good high as a point of reference.  We chose to look at the NASDAQ Comp in yesterday’s post and we refer to it again here tonight.  As we said, the Comp had dropped about 75 points and the natural retracement level would be based on Fibonacci numbers that indicated between 28 and 46 points.  Friday’s jobs report could change our thinking on this but Thursday’s market managed to take the Comp up 29 points from Wednesday’s lows and then it hit a wall and fell the rest of the day to close right about at Wednesday’s lows.  We think this means that the best the Comp can do in Friday’s market is to get back to that 2279 number of Thursday.  

We apologize for all of the technical talk the last few days but the message is clear:  stocks want to head down right now.  Today had to scare some of the bulls especially as the market couldn’t bounce off what should be very good support.  The next move could be what they call nonlinear meaning a drop of unnatural proportions.  The market is sitting in a very precarious position after Thursday’s close and needs desperately to have a rally.  We think the buyers are tapped out.

If the jobs report can revive the market for a little while that would be a bad sign in our opinion.  Likewise if the jobs report provides some further selling, that would also be bad because of where the prices are at the close on Thursday.  

We urge you to take a close look at your holdings, where ever and what ever they are to see if they are performing up to your expectations.  If not, this would be an excellent time to consider unloading some of your dead wood.  I see that INTC dropped below 20 today on its way, in our opinion, to single digits.  This stock was touted by the great Jim Cramer and about six weeks afterwards, it has dropped 20%.  This is the type of stock that should be released from your portfolios.  Of course, it should have been dropped when the Jim Cramer hype was all over the place; but that was the time when everyone was buying it, probably from Cramer.

We have been warning you to be careful out there and tonight is no different.  The market has become very treacherous.  We are anxious to see how trading unfolds on Friday.  We could see a rally back to 2279 in the NASDAQ Comp and that would be the time to exit.  Otherwise, the market could just go down from here with no buyers in sight.

Dow Industrials:  10,972.28  -33.46
RYVNX:   19.50  (well, maybe yesterday’s quote was right???)
RYAIX:  22.50
TLT:  88.61
BEGBX:  12.93

Correcting the Downturn

The stock market, following our preferred path, put in a pretty good low on Wednesday with a good rally after that.  The overnight futures are a fair bit strong this evening, too.  We think that the market will continue its up trend up until Friday morning at which time we don’t think there will be much, if any, reason to be long this market.  But, we will try to be patient until then just to be safe.

We think the current rally that started Wednesday afternoon is correcting the down draft that we have experienced since last week.  Looking specifically at the NASDAQ Comp, we see a high right at 2325 last Friday and a low today of about 2250 to pick fairly round numbers.  That’s a drop of about 75 points, just over 3%.  Today’s late rally took the Comp up to 2275 for a 25 point move, which would be a third or 33.3% of the decline.  Fibonacci retracements would suggest a range of 28 to 46 points for the correction putting the Comp anywhere between 2278, near its high for today, and 2296.  We prefer the move back to 2296 and maybe just a little higher but it should Stay Under the 2325 from last Friday.

If we truly are back to trading a down market we may not get to see that 2296 because of the strong down move that we expect this year.  That move could have started in earnest on Friday giving some fear to the market in the near term.  We can not be certain of this until we see what this corrective up move does.  Thursday should give us a really good indication of the near term move.  We will give our opinion in the next post.

Thanks for the comment, Charles.  I did see that article today and thought it was part of the reason for a short term bounce, what a true contrarian I am.  Those of you who didn’t see the article, Charles included the website in the comment from Wednesday.  And, I don’t really think the “experts” are reading the blog but then I don’t know.

We saw a good article in Wednesday’s CNN reports, too.  We have mentioned Mr. Roach a few times in the past few years and he brings us a good article again.  We encourage you to read the article, paying particular attention to the American side of the story due to the fact that his thought process seems to be close to mine.  He might be reading the blog too but I know he’s probably not.  Here’s the website:

http://money.cnn.com/2006/03/03/news/international/chinasaving_fortune/index.htm

In the mean time, Be careful out there…

Dow Industrials:  11,005.74  +25.05
RYVNX:   19.12 (This is not correct, should probably be 18.91)
RYAIX:  22.27
TLT:  88.58
BEGBX:  12.95  (the dollar has had a good run)

Was the Market Down Tuesday?

Let’s get right to the action for Tuesday.  The stock market kept going down after Monday’s drop but the Dow will be announced to the world and it managed a positive close.  When the NASDAQ Comp is down over 17 points and the Dow is up about 22, the “market” was down.  One way to view it is that on the NYSE, the declining stocks were ahead of the advancing by about a three to one margin.  

The news indicated nothing very noteworthy but there has been some media attention to the interest rates going up.  The last few days, the bonds have taken a beating as you can see by looking at TLT in the last four posts.  The recognition of the inverted yield curve is still a little bit in the background but the possibility of higher rates seems to worry the market a little.  Of course on Tuesday the bonds were flat to up a little and oil prices dropped below $62, neither of which should cause a drop.

Our opinion is that the market has now shown its hand a little more.  In Elliot Wave Theory, we have seen a pretty good five wave move down in the last two or three days since last Friday’s peak.  Right now the market could stage a corrective rally or it could drop a little more before it starts its rally.  We prefer the rally now as we see the Friday jobs report again as a potential turning point.  With the market somewhat focused on interest rates and what might cause them to go up, a strong jobs report may actually be cause for selling stocks.  

Make no mistake about it, we do not envision higher interest rates coming from a strong economy.  We actually prefer the deflation theory primarily due to the inverted yield curve.  This type of thinking can start to be considered again and we will explore that theory over the next few months here in these posts.  If rates do rise more in the short run, that will improve the theory as it will hasten the demise of the housing market.  As you faithful readers know, the Wednesday Update believes the housing market will go down of its own choosing, not because mortgage rates will go up.  2006 seems like a very important year for housing and its baby sister, the economy.  

Caution is the watchword so Be very careful out there… If we get this rally into Friday’s jobs report that I’m hoping for, we expect it will not take out last Friday’s highs.  That being the case, we will probably be in a position to sell into this rally.  If by chance we do get a rally above last week’s peaks, then we will need to reassess but this is our current plan.

Dow Industrials:  10,980.69  +22.10
RYVNX:   18.92
RYAIX:  22.28
TLT:  88.61
BEGBX:  12.95

A Down Monday???

Tuesday’s Wall Street Journal is running an article on the Credit Markets section entitled “Interest Rates Keep Climbing; For How Long?”  This article scratches the surface for possible reasons for higher interest rates and it is recommended reading from the Wednesday Update.  We aren’t sure that they have the story 100% correct but the themes are important in recognizing what is going on in the world today as far as interest rates go.

One thing that is glossed over is the near term decision in Japan of its willingness to end the absurd interest rate situation in place there for the last decade or so, that being the 0% interest rates on the short end of the curve.  We mention this due to the recent unwinding of the US carry trade we have discussed in the past.

Briefly, the carry trade allows someone to borrow money at the short end of the curve in order to carry a longer dated and higher yielding asset out on the curve a ways.  In Normal yield curves, longer maturities have higher yields due to the uncertainty of the coupon payments.  As you know, recently the yield curve in the US has trended to an inversion, meaning rates on longer dated maturities yield Less than shorter dated maturities.  Typically, this has foreshadowed a recession due to people Not wanting to borrow short due to the higher rates and therefore not borrowing and spending leading to the recession.

We here at the Wednesday Update have become more and more convinced that the seeming invincibility of the stock market in the face of an inverted yield curve is based on the possibility of borrowing in Japan with those exceptionally low rates and investing in, say, the US markets.  We have No conclusive evidence to provide but if the Markets think this may be true, then any change in that status may be important.  This change is indicated in the article but the implications are not as vividly described as we have here.

I would welcome any comments on this subject in any form, in the comment section would be the best so all of our readers can get a chance to benefit from your comments or questions.  

Back to Monday’s market:  We had a down Monday, something I find very unusual normally but not anymore due to the change in the wind, the direction of the market.  There were supportive news items like the Blackberry settlement from last week and oil dropping nearly two dollars today but the market managed to dig down a bit today and the Dow fell below 11,000 again.  

There have been signs pointing to a weaker market over the past couple of months and now the prices have started to reflect them.  We don’t have the space tonight to describe all of those signs but you can review the archives of this blog for further information.  The biggest sign is the strength in the Dow not confirmed by the broader indexes.  The only index that has tried to stay with the Dow is the Russell 2000, an index that is now very frothy and ready to lead the decline.  This index is associated with the many small cap growth funds that have become so popular over the past couple of years, especially in those 401(k)’s.

We recommend that you heed these signs and be very careful out there…

Dow Industrials:  10,958.59  -63.00
RYVNX:   18.92
RYAIX:  22.15
TLT:  88.55
BEGBX:  13.09

RIMM Settles

The Dow is struggling to keep up its fight to hold 11,000. Going into Friday afternoon, there were hopes for strong finish to a volatile week but sellers came in before the close and drove prices down from about 80 points higher to finish just under water. Similar things were happening in the broader indexes with the SP500, up nearly ten points during the early afternoon, closing down almost two; and, the NASDAQ Comp, up about 15 in the afternoon, closed down over eight points.

Late Friday, a story broke on RIMM. We have been watching, and you probably have too, the patent dispute over the Blackberry. Apparently, the two opposing parties were able to settle their differences with a little cash, I guess money still talks. In late trading on Friday, RIMM had a nice pop in price after this announcement. Looking at the price of this stock over the past several months, it doesn’t appear that anyone was at all worried that this dispute was not going to be settled for the Blackberry users. The trading in this stock should be fascinating on Monday.

There was a lot of happy (translate that Bullish) talk over the weekend from all kinds of media sources. From our deep contrarian spirit comes a sense of calm after all this rationalizing of the bullish position. We continue to be patient on the market as we know that they, the bulls, might have one last little push in them but it doesn’t really matter. The market is trying so hard to maintain its current status when we all know that the hardest market to buy is a bull market, it just never gives you a chance: You always have to buy at higher prices. This market is definitely not like that.

There are some big numbers coming out this week, the biggest of which is the jobs report due on Friday. We will keep you posted on the developing economic events that may move the markets. Be careful out there, be very careful…

PS Warren Buffet's letter to shareholder's is available and is a must read.

Visit http://www.berkshirehathaway.com/letters/2005ltr.pdf for the full text.

Dow Industrials: 11,021.59 -3.92
RYVNX: 18.60
RYAIX: 21.96
TLT: 89.33
BEGBX: 13.12

Market is Still Confused

The market decided not to extend Wednesday’s rally.  There wasn’t much action in stocks on Thursday.  The action was happening outside the stock market as is sometimes the case.  The dollar was down about a percent while silver was up over 4% to close above $10.  That move was enough to push PAAS up about 10%.  The bond market was down a little, about a half of a percent.  Oil was up about 2% to over $63 a barrel and if anyone was interested gas prices here in Minneapolis are near $2.50 today after we saw them touch just under $2.00 about a month ago.

Some of the news that may have had a bearing on trading today includes some retailers reporting soft February sales (due to bad weather).  ANF (Abercromie and Fitch) got smacked for almost 10%.  The ECB (European Central Bank) raised its key interest rate 25 bps to 2.5% while forecasting more growth in Europe.  Meanwhile, Congress approved an extra 13 weeks of disaster unemployment benefits for people out of work due to Katrina and Rita.  

Friday we hear about the University of Michigan Consumer Sentiment Index which is estimated to drop from 91.2 to 88.  The other data point for Friday is the February ISM Non-Manufacturing Index estimated to increase a bit to 58 (numbers about 50 indicate expansion).  Normally we would be talking about the jobs report coming out on the first Friday of the month but not this month.  The jobs report is coming out next Friday so not to worry.

As far as we can see the market is now poised for a drop.  The market has struggled to get up to these lofty levels and is having trouble maintaining these high prices.  The momentum of this rally is now behind us with an eerie sense of a drop coming.  For those of you who feel safer than you did a few weeks ago, you should make sure that your stocks have been able to outperform the momentum highs set earlier in the year.  If not, I would say that the rally for those stocks is over too.  Take care and…

Be careful out there, be extremely careful…

Dow Industrials:  11,025.51  -28.02
RYVNX:   18.37
RYAIX:  21.82
TLT:  89.85  (ouch)
BEGBX:  13.13

First of the Month is Strong

In market news today, the SOX, the Philadelphia Semiconductor index, exploded for more the 4% pushing the NASDAQ up in the process.  This type of move generally carries some event and on Wednesday morning the event was semiconductor stock analysts.  The big story, and this happens every year, is the second half of the year when analysts expect a major push on capital spending which translates to companies refreshing their technology.  

We could speak about the possibility or impossibility of that event today like the analysts did but none of us can predict the second half of the year.  We try to say that the consumer is at the end of the financial rope and needs to slow down their credit expansion which Should mean companies would actually pull down their cap ex spending.  

In that regard, Wednesday morning’s news on personal income and spending does dispute that statement as personal income rose 0.7% and spending rose 0.9%.  These numbers combine to let us know that people are spending more than their increase in salary.  Indeed, 2005 was the first year in a long time that the national savings rate was negative, meaning that people spent more than they earned.  

January construction spending was up a modest 0.1% with the consensus being up 1.0%.  This is generally in line with new home sales from earlier in the week, or should we say weak.  

In the mean time the stock market is generating a lot of turbulence but not going any where fast.  Wednesday, being the first of the month of March, didn’t really surprise us when there was a substantial rally but what do the bulls do for an encore?  We have seen a back a forth movement for a few weeks now and that tune is named “Turn”.  We fully expect that the market will drop and we say that for several reasons but one of the strong reasons has to do with the market.  Mr. Market doesn’t usually let people in if a bull market is afoot.  

Be extremely careful out there…

Dow Industrials:  11,053.53  +60.12
RYVNX:  18.35
RYAIX:  21.82
TLT:  90.48  (32 cent xdiv)
BEGBX:  13.08

GOOG Droops on Fat Tuesday

The news this morning was decidedly shrugged off by the market; you know, little things like the Giant GDP revision to up 1.6% from 1.1%, the Conference Board Consumer Confidence Index dropping to 101.7 from 106.8 with expectations of 104.6, or the Chicago Purchasing Managers Index falling from 58.5 to 54.9 when estimates were for an unchanged number.  

You might have thought we had forgotten about the existing home sales, but we haven’t.  We may have mentioned in the last post that the estimate was for a rise of 1.5%, don’t you know that the weather in January was extraordinarily warm and interest rates were still in a fairly nice home buying range.  But still the existing home sales dropped 2.8% very much in line with our thinking.  The market shrugged off all of this negative news…  

But then, the CFO of GOOG made some statements the market perceived to be negative and GOOG dropped about 50 points in about 5 minutes and dragged the entire market down with it.  Of course, GOOG was debated all day about whether it now should be  bought or sold and by the end of the day was only down about 27 while the broader market ended lower.

As bears, we would say that the market was ready to be sold or it wouldn’t have gone down.  This trading day makes the strong week of the month look a little tepid.  We anxiously await the follow through on Wednesday.  Our position is that the market is overbought and needs to have a firm selloff.  We believe that the market peaked in early January and has now been in the midst of telling us, with all of the non-confirmations, that the market wants to go down.  We cannot emphasize this enough.  Tuesday’s market was just another little message and we should heed it.  

We are getting more confidence daily that the market is rolling over.  You should be checking your stocks to see what they have been doing in this past two months.  If they are not performing better than the market then you need to consider selling them very soon.  Let me know via the comment section with any questions you may have.

Be careful out there…

Dow Industrials:  10,993.41  -104.14  (below 11k again)
RYVNX:  18.89
RYAIX:  22.12
TLT:  91.35
BEGBX:  13.11

Housing Hits a Wall of Sheet Rock

Just a couple of quick notes on Monday’s markets…  The Dow gave the broader market a chance to catch up a little as the NASDAQ Comp rallied for nearly a percent while the Dow managed a quarter percent move.  The Russell 2000 managed to make a new high for those of you in that category.  The SP500 closed just under its 2006 high.  This time of the month generally gives the bulls a breath of air and Monday was no exception.  

The news on RIMM was a little negative but the stock only dropped about 2.5% during the day.  The court case has been bounced around in the stock market just like the price of the stock itself.  The owners of the stock do not feel much pressure to sell thinking that the courts would never allow the Blackberry to go dark in the US.  

To our way of thinking, the housing number was the most important of the day and it was not positive.  The new home sales for January dropped about 5% but more important was the inventory of unsold homes which pushed to a ten year high.  The housing market has peaked and is already heading down but the price action is a bit delayed.  Tuesday brings the existing home sales and we will be watching for that.  The consensus is for a 1.5% rise in these sales.  We’ll discuss the results of these two data points on Tuesday evening.  Until then… Be careful out there.

Dow Industrials:  11,097.55  +35.70
RYVNX:  18.33
RYAIX:  21.79
TLT:  90.90
BEGBX:  13.01

Just Whistling

By all accounts this new week should tell us the story of what the US economy is doing.  We like the news items that are coming out this week such as Monday’s New Home Sales for January and Tuesday’s Existing Home Sales for January as well as a couple of others.  We don’t believe the market is really paying attention to these or other warning signs that are flashing red.  

Our short term momentum indicator is at an overbought position and the market volume has decreased a bit over the past week.  Right now, we are staring the first of the month in the face and are wondering if the bulls have just one more little push left in them.  We are probably going to be selling into whatever strength develops, or at least you should be.  We probably will add to our short positions.

Last Friday’s report on the durable goods was disastrous, as one report called it, neither durable nor good.  With expectations of a drop, around 2.5%, the number certainly disappointed at Down 10.2%.  This report can be ignored, and the market did ignore it, but the sting is still there: The Economy is Not Doing as Well as We Hear.  Yes, the indicator does bounce around a bit but down that much is a strong down move.  The big question is will it bounce back next month?  That is what the market Expects based on its reaction to the news on Friday.  

The market seems to be whistling past the graveyard, so to speak, disregarding the things we are pointing out right now.  We don’t think there will be much in the way of upside follow thru even if we do get a little more upside this week.  The selling will commence very soon.  There are a few stocks that have shown some signs of fatigue and these market leaders are also telling you the story of a sell off coming.  Be careful out there…

Dow Industrials:  11,061.85  -7.37
RYVNX:  18.76
RYAIX:  22.04
TLT:  91.05
BEGBX:  13.04

More Volatility

Thursday brought more of the same type of volatility we have seen over the past few days.  From the looks of it, the market is struggling with its identity, bull or bear.  Stepping back a bit from this week’s trading and looking over the past ten years we note that the NASDAQ markets are far from their 2000 highs while the Dow Industrials is a mere 7% or so away.  This is the tale of two markets, the high one that is in front of the people everyday, that being the Dow, and the rest of the market which has been struggling for the better part of six years, our apologies to the Russell 2000 which has been strong for the last several years.

The biggest event of the past few weeks is the Dow moving ahead without the troops and that is not a good sign for the market in general.  Next to that is the overbought position the market finds itself in after this latest move.  Thursday’s drop did alleviate some of the over bought condition but the market is set up for a fall.

In the news today, the Fed released a report showing the nation’s net worth, saying that the median family’s net worth increased by 1.5% (to $93,100) after inflation during the period of 2001 to 2004.  That is after a 10.3% move from 1998 to 2001 and a 17.4% rise in the 1995 to 1998 period.  To us it looks like the consumer has been spending a lot of their net worth, you know, taking advantage of the big ATM they live in.  (We know we promised to send out our net worth spreadsheet and we still intend to do that in the near future.)

There are no good words to describe the near term trend of the market so we aren’t even going to try this evening.  Have a good weekend and maybe we can be a better idea next week about what is going on.  Remember that next week is the first of the Month and a normally strong period but in light of the over bought nature of the market, we don’t see much upside from these levels.  There does seem to be a lid on the market at the moment.

In the news for Friday will be the durable goods orders.  Expectations are for a drop of about 2.0% after a 1.8% rise in December.  Again, we don’t expect this number to affect the markets much but want to keep an eye on it for developments.

Be careful out there…

Dow Industrials:  11,069.22  -67.95
RYVNX:  18.84
RYAIX:  22.09
TLT:  91.19
BEGBX:  13.08

INTC Left Out of Rally

In market related news, the CPI (Consumer Price Index) jumped 0.7% for January but, of course, the Core rate only rose 0.2%, so not to worry.  We only report this number because there seems to be some interest in what the Fed wants to do about interest rates.  When the Core rate is Only 0.2% the market can believe that the Fed is almost done.  We don’t want to be looking at the actual rate of inflation because that wouldn’t support the position (yes, the sarcasm is back).

For its part, the market popped pretty hard Wednesday as many stocks took off from yesterday’s down beat day.  So, for two days the market is about net nothing, Tuesday was down about a percent and Wednesday was up about the same.  We note that the Dow is making new relative highs and trying its level best to pull the rest of the market up with it.  We see this action as a bad sign, well, let’s just say, not good for long term bulls.

Even the bond market was up today on the CPI data.  Everyone must be thinking that the Fed has managed to hold the rate of inflation down with its recent rate hikes.  We don’t see it that way due to the fact that the bond market has barely budged during the same period that the Fed has raised rates nearly 4%.  We don’t  see the change in mortgage rates as being much more than just noise, up or down about a quarter of a percent in the last couple of years.  

Today’s news for the Wednesday Update is that the little company we have been following for several years, INTC, got hit by an analyst downgrade and fell a couple of percent in this strong market.  The analyst said the target price for INTC is 16.  We would agree with the assessment if he said 6 to 10 but at least he’s got the direction correct.  

There is much uncertainty in the market right now, even though the Dow has gone up to new relative highs.  The broader market is not participating and this should be heeded by the traders and Us.  Be careful out there.  We are going to be looking for a good point to sell into coming up very soon.  The market is now over bought and, of the major indexes, the Dow is the only one pressing to new highs.  The market is close to rolling over hard.  We are trying to be patient.

Dow Industrials:  11,137.17  +68.11
RYVNX:  18.72
RYAIX:  22.02
TLT:  91.42
BEGBX:  13.06

Down Start to the Week

The stock market retreated on Tuesday after a day off on Monday for President’s Day.  The sell off was not particularly significant except that it did happen on the first trading day of the week.  Looking at the technical position, there are several interpretations that are possible.  One of them is that the major indexes are pulling back for a test of last week’s lows in order to gather some steam and then push ahead.  This is not our preferred reading but one that does have some merit at the moment.  There are signs that the recent rally attempt by the Dow to make new highs, while successful, left the broader market lagging and showing a glaring non-confirmation.

At this moment we can’t be sure of the course of the market near term.  There are just too many possibilities.  We are watching carefully for another good selling point.  We are already on the short side of the market with our funds along with some bonds but we may readjust our positions or add to them if the opportunity presents itself.  Tonight we wait.

The LEI were strong for January at a plus 1.1%.  The market didn’t really pay much attention to them but did slide in the Southerly direction for most of the morning after a brave start to the day on the upside.  The rest of the day was spent moving mostly sideways into the close.

Wednesday we get to hear about the CPI and how it faired for January.  After last week’s PPI number pushing above estimates, we could see some higher numbers for CPI as well.  We still don’t think the number will have much bearing on the stock market.  As a reminder the inverted yield curve is still fully entrenched.  Meanwhile the Fed is worried about inflation and will most likely raise rates at the end of March at the new Chairman’s first meeting.

Be careful out there, any upside will not be worth playing, just selling.

Dow Industrials:  11,069.06  -46.26
RYVNX:  19.22
RYAIX:  22.31
TLT:  90.80
BEGBX:  13.06

Inverted Yield Curve Continues

While it was a few days ago, Friday’s news on the PPI continues to hold the Fed to their path leading to higher interest rates, at least short term rates.  Meanwhile, the bond market decided to pop up driving interest rates on the longer end of the curve down a bit.  Greenspan’s “conundrum” continues.  The Fed, it seems, has no choice but to raise rates again next month but the bond market stays inverted.  

Right now the rates on the curve predict a recession due to the inversion.  Late Friday, the two-year Treasury was 0.12% more than the 10-year Treasury which was 0.03% more than the 30-year.  You might see slightly different numbers but the point here is that the curve is inverted meaning the long bonds are arguing for a recession coming soon.  Over the weekend there have been a number of articles talking about this very issue, some arguing that it’s different this time, others emphatically calling for recession.  

Our position has been and continues to be that the recession has been delayed due to the expansionary tactics taken by both the government and the Fed.  The government has done everything in its power to spend money and lower taxes while the Fed did what it could to promote asset inflation so it didn’t show up in the CPI.  Since the economy has only responded by moving up 3% to 4% in the GDP, this strategy may not work very much longer.  Once the government is in debt and the consumers are in debt, where do we go from there?  We think the bond market knows.

The stock market has managed to get itself back to a slightly overbought condition even though the broader market can’t seem to catch up to the Dow.  The Dow being over the big 11K figure is diverting attention from the rest of the market which is definitely lagging behind.  We saw a great headline last Friday wondering why the big cap stocks hadn’t been participating in the rally.  The big caps Never really went down like the NASDAQ stocks, the tech high flyers back in the early part of the decade.  But, right now they are leading the pack and that is Not a good sign.  The article seems to have missed the point just a little.

This week has a couple of items for the markets to consider such as the Leading Economic Indicators (LEI) on Tuesday and the CPI on Wednesday with durable goods orders coming out on Friday.  We think the stock market will basically ignore all of them but we mention them just in case.  Maybe we’ll know more after tomorrow.  Until then, Be careful out there.

Dow Industrials:  11,115.32  -5.36
RYVNX:  18.77
RYAIX:  22.05
TLT:  90.95
BEGBX:  13.07

New Dow High Unconfirmed

The Dow made a good move to a new high, without the full participation of the rest of the market.  This type of move could very well be confirmed by the broader market over the course of the next few days but it does put a shadow on the Dow’s breakout.  As we mentioned previously, even the Russell 2000, the strong index, did not confirm today.  Yes, it was very close and may follow through on Friday but it Lags the Dow tonight.  These are the little cracks that show up near the top of a move.  

As we look at the other indexes, the SP 500 is close to breaking a new high but the NASDAQ Comp is about 1.5% away.  These numbers don’t sound like much but they are important due to the Dow’s leadership here.  The NASDAQ 100 is about 4% from its recent high.  

To add more technical information this evening, our momentum indicators are weak not to mention that two key indicators are not in strong confirmation positions, one being my favorite tea leaf, the 5 day upside volume and the other being the 5 day average new highs in the NYSE.  

The basic idea here is that the momentum high had probably been put in place, that being back on January 11th.  The two indicators are weaker in comparison to that date.  Looking at the 5 day upside volume, January 11th had 1,047 million shares and today had 975 million.  The January 11th total for 5 day average new highs was 302 while today it was only 135.  This last indicator shows you that there are fewer new highs, meaning fewer Leaders, in this latest advance.  So, while prices have moved a bit higher, the broader market is struggling.

Thursday’s news on housing starts was almost stunning, up 14.5%.  The media tempered the news, saying it was due to the warmest January on record for the country.  In other words, don’t worry, the Fed won’t have to raise rates.  Ok, maybe that tired old line is not playing in the market these days.  Today the bulls won.  We bears will have our day.

Be careful out there…

Dow Industrials:  11,120.68  +61.71
RYVNX:  18.46
RYAIX:  21.86
TLT:  90.23
BEGBX:  13.00

New High in the Dow

Wednesday’s market was decidedly upbeat even as the Dow bumped up against its January highs and stalled. Now, the question is, “Can it best those highs?” Now that the Dow is here, I guess it would be nice to see a little upside from the Dow so I could put some more of my cash to work on the down side. This move in the Dow has been, noticeably, without the broader market and this should be somewhat troubling to the bulls.

The point is not that they are worried about non-confirmations but that our analysis is showing some relative weakness in the broad market. What this means is that the market, the Dow, is making new highs but their stocks are not. This could lead them to be patient (should I say greedy) and hope their stocks move up with the Dow. So far, in the last couple of years, the Russell 2000 has been running well ahead of the Dow and now it is rather lagging it. From this view of the pond, the next move up will leave many stocks behind and will lead to a very large selloff as the Dow eventually tips over.

We are not sure if the Dow can actually make a strong showing above the January highs. The rest of the market is so far behind that a Dow flurry above its January highs would most certainly be short lived. The market in general is at a critical point right now with the Dow at a new high for the year (4 ½ years as they say) with the broader markets trying to catch up. This is not a well founded bull run but we have seen some upside.

Just a quick note about CAT, Caterpillar, a company we have mentioned here and a component of the Dow: This is the Dow leader up today to a new high. This stock needs some help if the Dow is going to keep going. CAT can't do it alone.

What happened on Wednesday? Well, as we mentioned, Bennie (was on the) Hill talking about the economy and said some contradictory things but the headlines were consistent with Higher interest rates coming. This, even as the Chairman made comments about the outlook for inflation over the next couple of years in the 2% range. We’re not sure the Fed will continue raising rates but we do know they still have an accommodative stance due to the huge increases in the money supply over the past year.

For the moment, I think the market was relieved that the Chairman finally spoke. The notion of continuity in the Fed seems comforting to the market even though there is talk of higher rates. The reaction in the dollar was positive. The dollar has enjoyed a particularly good rally over the last month and with the “tough” talk by the new Fed Chairman, that rally continued a bit more today. We think it’s about over.

Gold and silver were down on the tough talk and bonds were mostly calm. The stock market was not sure what to make of it all and was choppy all day with a positive outcome at the end of the day.

Thursday brings us January housing starts and we are always interested in those here at the Wednesday update. This report may not have much significance to trading but we are still going to pay attention to it. The underlying housing market has weakened considerably over the past six months and this should eventually lead to a slowing in the economy due to less consumer debt being allowed by the great housing ATM.

In that regard, we note tonight that WaMu, Washington Mutual, is laying off 2,500 at its home-loan business. WaMu is one of the largest mortgage lenders in the US and today it announced that it would reduce the number of its processing offices that provide administrative support to its home-loan business from 26 to 16. We just keep hearing negative news on housing.

Be patient and Be careful out there…

Dow Industrials: 11,058.97 +30.58
RYVNX: 18.80
RYAIX: 22.06
TLT: 90.21
BEGBX: 13.00

Back Above 11K

Tonight, we see that the Dow has indeed made another run over 11K and, not surprisingly, has left the broader indexes we follow in the dust.  This latest run has even left the Russell 2000 lagging.  This is not a bullish sign even though the headliner Dow number will be touted as big news.  

Wednesday we get to hear what the new Fed Chairman has to say and that should have some bearing on the course of the market for a little while anyway.  The natural course would seem to be for a pull back after this unconfirmed move up in the Dow.  The market should take some time to come back a little if it wants to give the broader market a chance to catch up.  So, that is the most likely scenario, tomorrow’s speech by the new Fed Head, while positively anticipated, will probably bring the market down temporarily.

That is not to say that it can’t go up because it most certainly can.  We just think that if it does go up without confirmation by the broader market, it is significantly doomed.  A new relative high in the Dow would certainly exacerbate an already confusing market.  So, we will wait.

In the news Tuesday, retail sales were up a big 2.3% for January, with many comments on the mild weather contributing to the good sales figure.  December’s numbers were revised Downward a tad.

In upcoming news, Thursday brings January housing starts (kind of a deceptive indicator on the state of the housing market due to spec homes being started) and Friday brings the Producer Price Index (PPI) as well as the Michigan consumer sentiment index.  Any of these do have a potential for moving the market but we still think the big event of the week is Mr. Bernanke’s appearance on the Hill.

Be careful out there.    

Dow Industrials:  11,028.39  +136.07
RYVNX:  19.06
RYAIX:  22.21
TLT:  89.99
BEGBX:  13.03

Bennie and the Feds

(Many apologies to Elton John for my particular use of his popular song.)

The stock market showed signs of weakness during the day on Monday but failed to follow through on those signs.  We have mentioned that the pattern in the market seems to be that of a clear down move but days like Monday through our thinking off a bit.  Since Monday’s are normally strong days, the down day should mean something to the bearish camp but tonight we must again wait until we see some follow through to the downside.  

The news this week is sparse so the new Fed Chairman’s upcoming appearance before Congress was hauled out as Monday’s excuse for weakness.  Since Mr. Bernanke has not given us much in the way of public speaking since his induction to the hall of bankers’ fame, this week’s speech is somewhat of an unknown for the Street.  The market expects the new Chairman to talk tough on inflation but to say that the end of rate hikes is near.  

We think that will hurt the dollar again and probably will have some negative effect on the bond market as well.  Meanwhile, the precious metals would benefit from such an outcome too.  One thing to remember is that anything the new Chairman says will probably only affect the market for a short period of time after which the real work will be done.  

The markets will try to recover on Tuesday morning after gaining some composure late in the day on Monday.  Then, the market will do what it thinks best.  Our momentum indicators are a little oversold now for the first time since the October lows.  Don’t read this wrong, the October lows were much more oversold than the current time frame but we have turned away from the over bought position the market has been in since October.

To be a little clearer, the position of our momentum indicators represents a place where some buying could come in.  We would remind you of what we have said recently about the Dow being the strong player.  If we could see the Dow continue its strength without the broader indexes participating, that would be a great sign and opportunity.  But, we have to Wait.

Until then, Be Careful out there…

Dow Industrials:  10,862.32  -26.73
RYVNX:  19.42
RYAIX:  22.41
TLT:  90.31
BEGBX:  13.03

Any Follow Through for Monday?

The stock market has very little news to work with this week including no significant earnings reports.  With that in mind, some caution might be indicated as we head into the new week.  Friday’s action was somewhat stronger than I anticipated but the major indexes failed to better their highs created on Thursday, the day before.

Without further upside being generated from this point, there may be a good chance for the bears to come back to Wall Street.  If we do see a push above the highs on Thursday, then we could see a bit more rally.  Remember the Dow is the strongest index of the majors that we follow.  This is the type of action that you want to see as a bear, that the Dow goes up by itself.  That is a good indication that the captains are moving but the infantry is lagging behind.  You can’t win a war like that and you can’t expect the market to follow through on the upside without the infantry.

If we see some upside in the Dow, we are hoping to see the rest of the market not participate.  If we don’t see some upside from the Dow on Monday, typically the strongest day of the week, then we may have exhausted the rally efforts.  Tonight’s markets are not showing any strength especially Japan which is down 300 points as we write this.  Our futures are not showing any life either but it is just overnight trading which is fairly meaningless anyway.  We need to see what happens when the market opens in the morning.  

Be careful out there.

Dow Industrials:  10,919.05  +35.70
RYVNX:  19.01
RYAIX:  22.18
TLT:  90.30
BEGBX:  13.04

Long Bond Returns

We need to correct something we said in yesterday’s post.  Clinton’s administration did promote the idea of pushing more 10 year bonds versus 30 year but do you remember the actual timing of the dismissal of the 30 year bond?  I thought you may need a refresher.  Back in 2001 there were many things going on not the least of which was 9-11.  During the months prior to that fateful day, the stock market had been losing ground and then that day generated a lot of economic upheaval as well as many other upheavals.  At that time there was serious consideration that a major recession would result from the fallout of 9-11.  And, in early November, the GDP was estimated for the third quarter and it had shrunk from the quarter before, quite an event considering what had been happening in the US economy for that past several years. But, what else was going on?

Yes, the stock market had been in a bit of a drop for the better part of the year.  The big news at that time was the Enron collapse.  Mr. Kenneth Lay had appealed to the government (and his friend Bush) to lend a hand.  The Bush administration didn’t think it could help Enron directly but one of the things it could do was distract the investor world to the bond removal.  This was supposed to bring stability to the economic conditions and interest rates in particular.  You may not have read the story or remember these two events being tied together in this fashion because no large media attention tied these two events together.  We do find it coincidental that the long bond is being reinstated just as the trial for the Enron players is starting.

To review the long bond auction, you may want to reach for the WSJ and read the “Return of Long Bond Hits All the High Notes” scheduled for Friday’s paper.  In the article it says that the auction went so well that the rate on the offering dropped 0.14% below the old bond.  And, it briefly fell below the rate of the fed funds overnight lending rate of 4.5% ending at a yield of about 4.511%, now that is what you call a flat yield curve.  

Okay, back to the stock market.  Thursday represented a negative bearish day even though the Dow itself managed to have a positive close.  The other indexes we follow, namely the SP500 and the NASDAQ Comp and 100, all fell, with the NASDAQ 100 falling about 1%.  The market opened strong following through from Wednesday’s strength but about an hour into the session started losing momentum.  The Dow managed to outperform the other indexes for the two trading days on Tuesday and Wednesday making the world think that it was off to the races again.  The problem is that the broader market didn’t have the same type of up move.  

The Dow put in a weaker intermediate closing high of 10,953 on February 1st than it did on January 11 at 11,043.  Thursday the Dow traded as high as 10,952 (I am not kidding, but this is the intraday high and the February 1st number is the closing figure) but it didn’t manage to close any where near that at 10,883.  This is after trading down to 10,737 late Tuesday.  Summary, along with similar numbers for the NASDAQ Comp:

Early January closing high        Dow 11,043      Comp  2331
February 1st closing high           Dow 10,953      Comp 2310  This failure is similar
Thursday’s trading high     Dow 10,952     Comp 2284  This failure is different

This last line is very telling about the market in general.  The Comp failed by 1.5% to match its February 1st close while the Dow almost matched it.  Thursday was very negative day.  The market has failed to follow through on Wednesday’s rally which should shake some confidence.

You might have seen the article on ORCL laying off 2,000 workers.  The article just said something about how GOOG and YHOO could hire that many people in a day so it wasn’t a big deal.  I think it’s a little arrogant to be waving off 2,000 jobs like it’s no big deal.  We call it whistling past the graveyard.

Friday may be a volatile day with the turn that we saw on Thursday.  Be careful out there and have a good weekend…

[We had another problem with the website last night so we are having to post this morning.]

Dow Industrials:  10,883.35  +24.73
RYVNX:  19.22
RYAIX:  22.29
TLT:  90.80
BEGBX:  13.08

CSCO Saves the Day

CSCO did indeed bring some life back for the stock market bulls with a little help from our ex-Federal Reserve Chairman Greenspan.  What he said did not really match up with the market’s recent mode of operation, that being, trading up on the Fed Not being able to continue their interest rate march higher.  Mr. Greenspan said the economy was stronger than most think and therefore the Fed has some unfinished business.  So, at least for Wednesday, the market is “having its cake and eating it too” since the market can now go up on good economic news that might force rates higher or it can go up based on a weak economy that would allow the Fed to slow its rate hikes down.  If you can follow all that, then maybe you could actually understand what the ex-chairman was saying, too.

Yes, the market had a good day today but we still think that is didn’t have that great of a day.  We have said many times that the market can play around all it wants to between areas of support and resistance but it only matters if those levels can be broken.  We remain bearish.  The Dow could try to eek out a few more points but it doesn’t really matter.  We only care about it breaking above the January highs, over 11K.  Then we might have to take a better look.

Wednesday is a historic day for the bond market as the US Treasury is bringing back the 30 year bond, something that hasn’t been around for about 10 years, Clinton’s era.  Back then, Clinton suggested that the government was spending too much money on interest by selling those long bonds with higher yields, so he suggested that the country abandon the long bond in favor of the ten year bond.  This was a good idea at the time but now long rates are at about the same level as the ten year so it seems like a good idea to bring them back.  To celebrate, the Treasury is bringing about $14 billion worth to market.  There is some expectation that the sale will go well.  From this desk, I don’t really understand how someone can invest in 30 year bonds in this environment, especially when you hardly get anything for going out that far, except more risk.  Good luck to all of you out there buying them.

Dow Industrials:  10,858.62  +108.86
RYVNX:  18.85
RYAIX:  22.07
TLT: 90.39
BEGBX:  13.03

GM Slashes Dividend

In an article that will appear in Wednesday’s WSJ, “Finding a House Gets Easier”, we find a few items that bear mentioning (yes, I said “bear”).  This type of article really points up the fact that the housing market has quickly cooled from last spring’s crazy pace.  On Tuesday, Toll Brothers (TOL) reported a 29% decline in new orders for first quarter, ending January 31.  We have mentioned TOL in these pages due to its high profile among home builders, selling luxury homes.  With Tuesday’s news, TOL slipped to a 52 week low under 30 after trading near 60 last summer.  The company represents our position very well that the housing market is in a little trouble at the moment.

The same article mentioned the inventory of houses and condo’s on the market has continued at a very high level saying that with seasonal adjustments, inventories have climbed 38% since April, the largest 8 month increase on record.  This inventory has provided buyers a good chance to take their time about buying due to the available selection.  The article has a chart that shows the change in inventory in various markets such as DC, Miami, Los Angeles, and Manhattan, which are, respectively, 149.2%, 98.3%, 88.0%, and 86.9% more than last year.  Detroit made the list with a 38.0% increase.  Could that be due to two causes, US automaker woes and general housing woes?  

Speaking of the US automakers, GM was in the news again today finally deciding to slash its dividend, in half.  In another WSJ article from Wednesday, front page, “Pressured GM Slashes Pay, Benefits”, we learn that GM will cut its dividend and pay for its top five executives as well as curtail benefits for salaried workers.  The article says that GM may have to file for bankruptcy protection in things don’t change.  This is in sharp contrast to the Toyota Motor Corporation which is “gnawing at GM and Ford’s market share”.  Toyota, the article continues, is on track to invest $11.8 billion in plant and equipment before the end of its fiscal year which ends March 31.  This is up nearly 30% from the year before.

In precious metals, we weren’t shocked to learn that gold fell about $20 today with silver down about 35 cents.  With that move, Jim Cramer’s influence on PAAS is just about over as PAAS fell over $2 back to levels prior to Cramer’s tout last week.  Cramer was also long one our favorite shorts, INTC.  I’m not sure if he ever told you to sell it but INTC has not had such a good month closing today under 21 after trading over 26 in early January and over 27 in early December.  

One of our readers, an avid follower of Cramer I guess, mentioned he said that if the Fed raises rates one more time, he will quit his TV program.  Come on Ben, let’s help him out.  You do remember that the new Fed chairman is Ben Bernanke, right?  That decision is more than a month away and a lot can happen between now and then.  Sadly, we are expecting the Fed to find it difficult to raise rates in March with the trouble we may see.  But, Go BEN !!!

After the close this evening, we heard from CSCO.  The news wasn’t really outstanding but the market liked something.  Yes, the revenues were up but earnings were down, with CSCO up to its old tricks of earning how much above expectations???  You guessed it, 1 penny.  Isn’t it amazing?!?

Well, let’s see what happens on Wednesday.  Will CSCO be able to give a short term boost to the market or not?  To us, it would just be a good selling opportunity, the market wants to go down so…you Be careful out there.

Dow Industrials:  10,749.76  -48.51
RYVNX:  19.27
RYAIX:  22.32
TLT:  90.60
BEGBX:  13.05

Dull Day

Not much to report for Monday.  The market couldn’t manage to stay awake long enough to trade today.  This means that the market will likely try to bounce on Tuesday morning even though there may not be much staying power.  We still contend that the market is about ready to give us lower prices and that has not changed today.  There is some uncertainty out there but mostly it’s called complacency.

We don’t normally discuss measurements to complacency but one such measure is the volatility index which examines price levels of options.  These volatility measures have contracted over the past three or four years.  In the late 90’s and early 2000’s the volatility index moved between 20 and 40 after having been near 10 in the mid 90’s.  Over the past three years this number has again fallen back into the low double digit range.  

As you might have guessed, on options expiration Friday, January 20th, that number jumped considerably from about 12 to about 14.5.  Since then it has fallen back, in the rally after that 200 point decline and now has risen again to just over 13 today.  That is the nature of index.  It gives you information of the current mood of the market.  

We expect that number to increase back to the 20 range this year sometime, forced there by plenty of downward pressure on the market.  The market certainly is not prepared for a major drop right now and a 13 in the volatility index represents this complacency.  We will monitor this number as the market declines to see if that complacency can be changed to fear.  Complacency is the first cousin to greed, the lazy cousin but a cousin.  The fat cats sit back and say they will wait for the next big up move before they sell.  That big up move comes and then they say I can wait longer.  Then the market goes against them and they say, I should have done this or that.

We want those cousins to sell their stocks to us when prices go down but for now, Be careful out there.

Dow Industrials:  10,798.27  +4.65
RYVNX:  19.14
RYAIX:  22.24
TLT:  91.03
BEGBX:  13.06

Jobs Report Pushes Stocks Down

It’s a brand new week and the market needs to find some footing right now.  Some of the indexes we follow are getting close to their late January lows and some have gone below them.  The pattern of these indexes is distinct and represents the start of a down move that could develop fairly quickly.

The first clue the market gave was back on the January options expiration, January 20th when the Dow dropped some 200 points.  The futile, but inevitable, rally attempt was met with selling and now the stock market is heading back down, this time may be steeper than most expect.  

On Friday, the market continued the down trend that started on Thursday, and that was on no real news.  Friday did have some news, the jobs report, that was fairly good but “stock market” bad because it was perceived to keep the Fed in a position to raise rates.  This media confusion is not unexpected but it does need to be taken into perspective.  We don’t really care what the media says; we care what the market says.  

The market set a low target back in late January that target now will act as some support for the next few days but we think the pattern is such that it will not hold for long.  The market is in a very precarious position at the moment based on the momentum indicators and the basic technical position that exists.  We urge extreme caution and repeat our recent mantra … Be careful out there and we hope you’ve already sold into these rallies so far this year.  

This coming week is a fairly quiet one as far as news goes, with hardly any economic news to speak of and with most of the earnings reports out.  We think that if the selling continues on “no” news, that would not be a good sign for the bulls.  Monday’s can be strong but the market has seen the early month rally and now is faced with some trouble in the next couple of weeks.  Be careful out there… (one more time)

Dow Industrials:  10,793.62
RYVNX:  18.98
RYAIX:  22.15
TLT:  90.85
BEGBX:  13.12

January Jobs Report

Thursday was not a good day for the stock market. The only news that might have weighed on the market happened to be the productivity number which was down for the first time in five years. Since that news was promptly disregarded by analysts, I don’t think that was the reason for the stock market’s drop. But then, what was the reason?

This type of day is much like the worst event for bulls due to the drop "without a cause". While we argue with the price of oil having much effect on the stock market, the price of oil was down on Thursday, too, without much impact on the decline in stocks. When the media has trouble figuring out “Why” the market went down, then there is a Reason it went down but it can usually only be explained by general selling.

The market ended the day with earnings news from AMZN which wasn’t very good. That’s not going to be enough to push the market down, especially if GOOG’s news was not enough to move the market down. The week’s news does seem to have a negative tilt to it so the market has tried to keep a positive attitude (Fed reasoning). What’s coming on Friday morning is the jobs report. There is not much riding on the number but, for the bulls, the number shouldn’t be very good or the old “Fed has to raise rates because it’s too good” trading environment may occur. If the number is not so good, the market can go merrily along, as in whistling past the graveyard.

All of this talk tonight will have no bearing until we can see what the trading will be like in the morning After the jobs report. Thursday was a scary day due to no proximate cause for the decline. Normally this time of the month brings some strength to the market and looking back over the past two weeks we have seen a pretty good rally but today was a different story.

We remind you of our normal position that we take: The market has set a goal for itself during the first few weeks of the year. Then a pullback occurs, a strong pullback, and the market needs to try to overcome that pullback and try to rally above it. We talked about the rally that “couldn’t” this week and today helped confirm that thought. Friday is an important day so Be careful out there and we hope you have sold into this past week’s rally.

Dow Industrials: 10,851.98 -101.97
RYVNX: 18.51
RYAIX: 21.87
TLT: 90.21
BEGBX: 13.18

Dip Buyers Unite

The market was true to form on Wednesday morning as it gapped down on the GOOG news and proceeded to rally them from there.  The late morning showed little in the way of movement but after a brief drop right after noon, the Dow moved up strongly to close nearly 90 points on the day.  Today the Dow was leading the pack which is not necessarily the way the bulls would like it.  We could see the Dow peak its head above that 11K figure again only to go there without confirmation from the broader market, and we are speaking of the other major indexes we follow, NASDAQ and the SP500.

The big news for today was the “Blackberry” news which suggested that RIMM could possibly get out from under the patent infringement case it has been under for a while now.  On that news, RIMM rallied about 10%, no fear there.  Even GOOG managed to rally back up above 400 by day’s end so not much fear there either.  We had a notion that GOOG’s news might have a negative impact on the overall market but apparently everyone is ok with the minor miss that GOOG had.  And, the SOTU (State of the Union) address on Tuesday evening didn’t spark any consternation on the street either, not to mention the little interest rate bump the Fed did on Tuesday.  Nothing seems to matter to anyone.

So, that’s about all there is for Wednesday.  Remember there is another event this week that could move the market—but probably not—and that is the jobs report out on Friday.  We’ll talk to you tomorrow and don’t forget to Be careful and Be selling this rally.

Dow Industrials:  10,953.95  +89.09
RYVNX:  17.93
RYAIX:  21.52
TLT:  90.04
BEGBX:  13.15

The Day of the GOOG

As far as the market is concerned, GOOG trumped Greenspan and Bush on Tuesday.  GOOG announced earnings that were, shall we say, less than the market was expecting after the market closed.  The stock was quickly down about 30 points and fell about 70 at one point before closing down about 50 in after hours.

The Fed did celebrate Greenspan’s last meeting with yet another giant interest rate increase of 25 bps, widely expected of course.  The market spiked one way and the other for the rest of the afternoon but basically ended just about where it was right before the announcement.  The Fed finally removed the “measured” language from the statement which might have been a reason to buy stocks but basically it failed to move the market much.  We keep reminding you that rates went up today even though it wasn’t very much.  A quarter point here and a quarter point there and pretty soon you are talking about some real money—ok I stole it, get over it.

The State of the Union (SOTU) speech seemed to be focused mostly on the war on terror but there were a few other things that Bush mentioned, some of which can be constructive to the market.  He made comments on holding the line on taxes by making the current tax cuts permanent.  And, at the same time, we are magically going to be able to cut the deficit in half by 2009.  The SOTU was not endorsed by the overnight markets as they were down about the same as they were prior to the speech.  Like we mentioned earlier, GOOG had the impact on the market, not the Fed or the SOTU.

We are flying a little blind this evening because we don’t have internet service but we will try to get this out in the morning if we get service back up and maybe we can make some comments on the pre-market.  With GOOG causing havoc in the after hours, the first of the month trading could be a little soft to start out.    


It’s Wednesday morning and the futures in the premarket have mostly stayed lower but have come up a bit, with GOOG only down about 48 as I write this.  When the market opens we will see if they can rally them after a nice drop in the early going.  The market is vulnerable as you can tell by a drop like GOOG produced.  The rally that “couldn’t” make it back will now have trouble reinstating itself.  

Dow Industrials:  10,864.86  -35.06
RYVNX:  17.98
RYAIX:  21.55
TLT:  90.67
BEGBX:  13.26