Definite Break on Friday

Top Line: As mentioned in our last post, "we think the market is one bad day away from really taking a dive." That "bad day" could have been Friday and probably is. The market has broken below important support and most 200 day SMA's confirming the downtrend is continuing.

[Editor's note: SMA stands for "Simple Moving Average" and represents the average of the last number of days in the average. The main two SMAs are the 50 day SMA and the 200 day SMA. The way prices move with respect to these moving averages can give us important extra information that we can use to trade better. In fact the way these two SMAs move with regard to each other can also give us better information, compared to reading the financial news.]

Looking back to October, the market, as measured by the Dow, was making new highs over 14K and Friday the Dow put in a close below 12K. That's not a new event this year but it is the first time since the May highs when the Dow was above 13K. We bring this up to remind ourselves that those highs brought the Dow back up to its declining 200 day SMA.

Meanwhile, the NDX, our favorite index, has been outperforming the Dow on the upside recently and has been flirting with its 200 day SMA for about two weeks. Friday, the NDX (NASDAQ 100) fell hard away from its 200 day SMA. The implication as we see it is that the NDX is about to accelerate lower and start to lead the Dow on the way down.

This evening we saw one article of interest, well to us, anyway. It is something we have tried to say in our own way, that the fact that the world doesn't care about risk...wait, that should be did Not care about risk. This attitude is what has caused a great deal of trouble in the world. People have thrown caution to the wind and done things that they normally would not do except knowing there was No risk, or being dupped into believing there was no risk.

Tonight the markets in Asia are rebounding from their opening lows and the US futures are happily trading higher in anticipation that the "lows are in again" and that Monday can forget about last week's poor performance. The oil ministers suggested that they would increase production of oil to help prices come down, Obama said he was going to crack down on oil speculation, and the price of oil is trading up this evening. We still think the price of oil will drop very soon and that the $139 price will be the high. We are keeping a close eye on these developments.

This should be an interesting week...

FSI: 92.00 (a strong retreat here with all four members down)

Another Week is Over

Top Line: As the market opened on Thursday there was a sense that maybe it would break through the support levels but within the first hour of trading all major indexes had found their lows for the day and moved up from there. The move up doesn't look like a major up move starting but rather a counter trend move that will be fully retraced back down.

We thought in our last post that Thursday was going to be an important day but it turned out to be like so many others where the market opened one way and then reversed to the other way. In this case we started down on the day and reversed to the upside. We see the market seems to be trying to follow the price of oil for direction. As far as oil goes, it was up in the morning but then fell all day to end down nearly $5 on the day. This gave stocks a reason to move up all day.

As we have said many times before, once something seems like it's going to "always" work, it won't. So far though, the market wants to believe that if oil goes down, the stock market will have no worries. Another familiar theme here at the Update is the price of oil has moved up with the stock market. Yes, the oil move has outlasted stocks but it has been due to the same liquidity availability.

Our position continues to be that liquidity has now been reduced because financial companies are pulling in their horns and trying to raise capital. Banks only want to loan to the cleanest risks out there as opposed to giving 100% LTV (Loan to Value) mortgages to anyone who could fog a mirror (no, it's not our saying but we like it).

The biggest news item was from the CFO of C (Citigroup) who indicated that he thought there would be, according to the article, "substantial additional writedowns and more losses on consumer loans." That doesn't sound like it's company specific or that the Bottom is in on the mortgage crisis. C was down on the news.

In other banking news, BBT (BB&T Corp, a regional bank) was under pressure during the early part of the day due to the market expecting them to cut their dividend; but, the company said it was "thinking" about raising said dividend and the stock jumped out of the doldrums back to even on the day, a huge round trip move on the day. Of course, this news, in contrast to the news from C, was applied to the entire banking industry, well except for C.

As we close the books on another week, we think the market is one bad day away from really taking a dive. Whether we have to wait a couple of days, weeks or months, really doesn't matter. We are short and we are patient. Friday is the options expiration day and may provide some fireworks on both sides of zero so we'll be watching.

FSI: 94.48 ( another record high for RIMM )

Market is On the Edge

Top Line: The market came very close to the edge of danger with the Dow breaking below 12K for the first time since March. The Dow managed to gain its composure and rally out of the abyss...today. From our perch, the Dow is almost certainly going to attempt to test the March lows, those made around the time of the Bear Stearns takeover.

Well, it is Wednesday night and the market is on the edge. We sometimes mention that when the market is oversold there is a real chance for a big selloff. We have been at this brink a few times since we started the slide from the October highs and here we are again. Our momentum indicators were oversold last Thursday night and we got a bounce out of that but that bounce was over when the markets opened this morning.

FDX (Federal Express) announced disappointing numbers and in fact said it lost money last quarter due to some one time charges for Kinkos and of course the cost of fuel rising so fast. (In case you're wondering, we are still holding to lower energy prices over the next few months.) Then there was Morgan Stanley (MS) reporting a 57% drop in profits, yes due to debt losses. The stock opened down about 8% but pretty much rallied all day long from there. You know the story, the bad news is behind us...Again. Right.

And, don't forget the Fifth Third news that they were going to raise some capital by $2 billion assuming they could sell some preferred stock (yes, convertible to common stock) and maybe some subsidiaries. The company said that operating earnings for the quarter would be basically zero with some extra one time charges making it worse than that. They cut their dividend to 15 cents from 44 in an effort to conserve capital in addition to the other moves listed.

The rest of the news wasn't much better but these three items got the market off to a poor start indeed. As per normal though, after about 90 minutes of trading, the lows of the day were in and the market had a violent rally but that led to more selling and a little back and forth into the close. Still, the market was down about a percent across the board. As we write, the Asian markets are down about twice that and the US futures market is down a little, not much. Tomorrow's trading around the globe from Asia to the US will be interesting as the sun comes up on the various stock markets.

We don't like to say this but sometimes it needs to be said...Thursday could be an important day. We've talk about it here tomorrow evening. Let's see if the bear has any power. There is a good chance that the market could continue down tomorrow. One issue is options expiration is Friday the 20th...

What's on tap for news on Thursday is the rate decision from the Bank of England, leading indicators here in the US, and the Philly Fed report. The Bank of England has been threatening to raise rates to counter inflationary pressures but as is the case here in the US that will be difficult to do.

FSI: 94.01 (down again, in spite of RIMM near all time highs)


We received some response to mentioning the CEO dump at AIG. Thanks for the comments and our favorite Southerners are in my thoughts as usual--"Hank the Tank" is great--that would be Greenberg for those who don't know.

And, Trish, here are two pictures for you, taken on Father's day. So, the first one is of three sons and two fathers--how many people are in the picture??? Right, three. Still difficult to believe...






Then, here is the Fearless Foursome, again, ready to tee off.

Fed Speculation by the Financial Press

Top Line: The stock market continues to hang tough at these higher prices but the next move should be down. The next down move should also be strong even though it doesn't seem to want to go down, it's definitely ready.

The news prior to the opening bell this morning (Tuesday) was not very encouraging such as the PPI which was up 1.4% for the Month. Straight from Bloomberg: Producers paid 7.2 percent more for goods from May 2007, compared with a 6.5 percent gain in the 12 months ended in April. Excluding food and energy, the increase was 3 percent from a year earlier, the same as in the prior month. In other "not so bullish" news, the housing starts were down 3.3% to a 17 year low...how long ago was that? Yes, back in 1991, a year we have mentioned once in a while here in these pages.

But, it seems the real news was on page one of the WSJ where we learned that the "Fed Mood Tilts Away From Rate Increase". [This may be a pay site but take a look at the paper version sure to be coming to your desk in the next, oh, week or so, June 17th.]

This article is telling the stock market not to worry about the pesky Fed raising rates until at least the fall sometime. You have been reading Here that the Fed will Not raise rates. That does Not prevent the stock market from going down, in fact more to the point, the market going down will actually insure the Fed will Not increase rates.

The other ingredient is oil and our position on oil is the same as it's been for a while--oil and the stock market go in the same direction because of the huge liquidity available that needs to be put to use somehow. It goes into commodities because the "dollar is weak"...let's not go there tonight since we have argued for some time that the Dollar has probably put in an intermediate term bottom and is now on its way up. No, not everyday, that would not allow all this talk about interest rates and oil and the stock market and how they interact.

The real losers today were the financials with C (Citigroup) and LEH (Lehman Brothers) leading the blue chip indexes lower. The Bank index (KBW as reported by the WSJ) was down nearly 4% on the day. This index was around 120 about a year ago and is now at 65. These stocks have been affected by the deep pull of their mortgage loans. All of the components were down with one, Zions Bancorporation, down over 10% on Tuesday.

Erick reminded us that the Chief at AIG has stepped down. Most people know how this works, give the guy a nice sendoff and Hope that the new guy can bring some stability to the price of the stock--does no one get that they need to tend to Business and the price of the stock will take care of itself. Well, in the taking care of itself business, AIG's stock took another dive along with many financials, this to a 10 year low.

FSI: 94.78 (up on the day but GOOG held the index back with all three other components up)

Miscellaneous Trivia

Top Line: Trading in premarket was subdued because oil had popped to a modest new high, still not too far from the range it's been in for a month. But, from those early highs in oil, prices fell most of the day and oil closed down on the day. Stocks prices were firm as the price of oil dropped.

We find the whole "trade stocks based on oil prices" to be contrived, mostly. Here we see the public being very persuaded that higher oil means lower stocks. It's a foregone conclusion that lower oil is less inflationary and better for stocks. The problem with the theory is that it just hasn't been the case. We say the stock rally has corresponded very well to the oil rally we have seen. Ok, let's not argue facts with the stock market, they hardly care about facts.

The news continues to bleed bad ink with today's New York Fed Manufacturing Index falling to -8.68 from -3.23 on expectations of -1.5. Here anything below zero signifies contraction. Expectations were for an Improvement but the reality was much worse than expected.

Tomorrow we get to see the PPI report and after last week's CPI number, this should be an interesting number. We'll be interested to see how Wall Street spins this one. The CPI number was tortured and remains a Big number but the stock market took it in stride???

Other news for Tuesday is the Current Account Gap and May housing starts, both of with could be market moving but probably won't be. The bullsh contingent is hoping to see a "bottom" in housing again this month. Optimism and Complacency Rule.

We are going to leave you with a short post again this evening but the message of the rally is that there will most likely be a selloff right on its heels. We think that time is close.

The SMA (Simple Moving Average) is an important part of a technical toolbox. Major behavior in stocks as measured by the 200 Day SMA are very important to any longterm trades. Combining the 50 Day SMA with the 200 Day SMA can yield some insightful itmes.

In the case that we are talking about (in our last post), the NDX is riding the 200 Day SMA with what we consider to be Bearish undertones. In this case we think the right look for the position of the Q's, as they're called, is that it touches/touched it's 200 Day SMA 9right around 48.25) and should now fall away from it aggressively.

FSI: 94.42 (highest level since June 5th)

Dollar at a 3 Month High on Friday

Top Line: Friday's markets jumped out of the gates with the Dow quickly up about 175 points. Then we had a pullback followed by another rally such that the stock market ended pretty much on the highs of the day. This move has relieved some of the oversold condition in stocks. The rally has taken us back up to the 200 day SMA (Simple Moving Average) in the NDX and the QQQQ's. This line should provide good resistance for trading in the next few days and lead to further selling. By the way, Asia markets are up tonight in response to the Friday US markets.

The big news on Friday: CPI was up 0.6% for May (about 7% annual rate) but that is a seasonally adjusted rate with the real rate at 0.8%. Of course, not to worry, the "core" rate was only up 0.2%. Also, the sentiment figure dropped on the U Michigan's sentiment index from 59.8 to 56.7. Yes, oil was down a tad but still is near all time highs. Do you think the news is bullish? No, we don't either but the news is not the market...

One of the things to keep in mind for trading this week is the options expiration which should provide some near term volatility--when we say volatility, we mean up and down action. For the most part complacency rules but we think this is about to change with the stock market heading South again soon.

Friday's trading also gave us a new relative high in the US Dollar index which has been on our radar screen for a while. This is the highest it's been since late February. We have mentioned the Dollar in several places recently because we think it will be going up, continuing to go up is what we mean.

Dollar strength leads to some of our other thoughts for the markets. Gold versus the dollar is and should be a constant battle. Inflation erodes Dollars and gold as we buy it is measured in dollars so it tends to go in opposite directions to the Dollar. That means with the Dollar going up that Gold should continue to go Down.

In fact Dollar strength is at the center of our thinking on Oil, too; yes, gas, too. With a stronger Dollar and with Oil purchased in Dollars, it stands to reason that Oil will go down in price, too. Some would say that the price of oil is about to go "to the Moon" but that only strengthens our argument, with our contrarian position.

Dollar strength could be good for US Treasury bonds, too. They do seem to have come off their highs over the past several months (since the Bear Stearns situation in March) and seem ready for a reversal higher. This means the price goes up on the bonds, and the rate goes down.

This subject, interest rates, gives us a chance to talk about the silly talk out of the Fed the past few days. They have recently been talking Tough on inflation, like they are just about ready to raise rates...right. Did anyone tell these guys there is an election this year? Or, that the economy was in a little trouble? The only thing they seem to watch is the rate on the Treasury bills which has come up along with long rates but at a faster pace.

What this rate rise on the T-Bills does to the Fed is persuade them to Think about raising rates. Back in March, these short rates went below a half a percent and now they are back up pushing 2%. Where is the fed funds rate? 2%

The Fed, in their simple model, now are seeing T-Bill rates move back up and think they have succeeded in their task to relieve the credit crunch. Maybe we give them too much credit here but seriously, what they look at is how Banks are affected by the credit problems. They Never give a second thought to inflation or how the Dollar might be affected.

To tie this up in a nice little bow, we have suggested that the Dollar has bottomed and should continue to rise (we watch the Dollar index which is a basket of currencies). This action is a surprise to the markets and they don't really understand what is happening. The short end of the Treasury market is the one that we need to keep our eyes on for the Fed's actions. Since we have little reason to think the Fed will be raising rates anytime soon, we must think the T-Bills rates will fall. We are not convinced of this but it does seem the right answer given all of the above fairly logical reasoning. Of course, your comments are always welcome.

FSI: 92.84 (GOOG had a big day but this index is still down 12.7% on the year)

Stock Market Reverses From Highs at the Start

Top Line: Thursday's market action has the characteristics of a very typical bear market. That is, there is strong buying early because the bulls Want to believe so bad. But what happens next is there is no place to go but down and the sellers come in. These days will become a part of the way trading will be done and as traders, you can capitalize on this pattern.

We're going to let CNN Money write our news items this evening but the highlights are that Oil was down about $5 a barrel early along with higher retail sales, brought on by both higher prices at the pump and several billion dollars in free money from the government. By the end of the day oil had rallied back and closed up on the day which seemed to cause the market to drop all day long. As a backdrop to all of this, the Dollar was rallying strongly and looks like it wants to continue its recent uptrend. The other news during the day was that MSFT(Microsoft) has dropped its bid for YHOO(Yahoo!)

Last, we want to remind you of the situation over at LEH (Lehman Brothers) where the news continues to be bad. LEH had been smacked pretty hard back in the dark days surrounding the Bear Stearns' debacle in mid-March but came out of that episode looking unscathed, sort of. Now, the company seems the next one that is need of being "bailed" out so we will keep our eyes on that situation.

Today's stock market action seems to be bearish on the surface because of the intraday reversal and near collapse at the end of the day. Out of the ashes came a rally in the final minutes of trading that eliminated all of the losses in the NDX (NASDAQ 100) and gave some life back to the Dow which had gone flat after a stunning burst of strength at the open.

The bear market has a long ways to go but we are going to get these types of rallies all the way down and they will hurt our day to day performance but there should be continual progress to the south. We do not recommend that you try to trade this treacherous market unless you are willing to be quick. As they used to say about Los Angeles, they have the Dodgers and the Angels and the way people drive you will be one or the other. Ok, the analogy doesn't really fit but in this market you need to be nimble and dodge as many bullets as you can, maybe we should have used the Matrix analogy instead. That would have been a little better.

In these times of financial uncertainty, you need to figure out the best way to Maintain your principal and gather cash for really good opportunities later, either in the market or in the highways and byways of life. We are here mostly to provide some entertainment for you along the way. Tonight's entertainment is over, oh stop clapping, but there will be more on Sunday evening. Have a happy Father's Day and, whether your father is here or not, think some good thoughts of him.

FSI: 90.50 (GOOG's advance couldn't hold up the Speculation index)

Market Gets Hit Again

Top Line: After a 205 point Dow drop, that index has fallen about one thousand points in about a month. While this sounds like a lot, we don't really think the downside pressure has caused much fear at all which would mean there should be a little more downside to go. Still, bounces, possibly sharp, can occur at any time.

The main event on Wednesday is the action in the Dow Transportation average. We seem to hear that the high price of oil pushes stocks down, which isn't exactly true as we've pointed out several times here, but if it was true you might surmise that the index that would be mostly affected by higher oil would be the Transports. Back on May 19th, that average made an all time high price level as oil was moving to all time highs as well. All that aside, today the Transports dropped over 4% and are down about 10% from that May 19th high.

As we examine the fear factor in the market, we see that there is some but not nearly enough to consider this down move complete. We are speaking mostly of the volatility indexes, the VIX in particular although the VXO is equally as sanguine. Yes, they are both up but only to the mid-20s and we expect a push to about 50 or more before we see a really good buying opportunity.

The Asian markets are having more difficulty this evening, too, with the Chinese market down another 3% again tonight with Hong Kong and Japan down about 2%. This is after wide losses last night, China was down about 7% last night.

We would like to go back to last night's post when we were discussing the rate hikes the Fed is contemplating. We are particularly surprised by Bernanke's announcement that he wants to be an inflation fighter and support the dollar. He has proved to us over and over and over again, hum a few bars with me, that he's only concerned about the banks. But, now, he's all about the inflation story that the main stream media is talking about.

It's almost like he has set us up for a problem that he and his merry men at the Fed can't deal with directly the way they normally do, in lowering the fed funds rate. Effectively, the Fed has now taken a position that the next move in rates will be up. To us this leaves a little hole that the market won't be able to have filled by the Fed. This could be an issue and may cause some deterioration in prices.

FSI: 90.80 (not holding very well)

Jackson is holding very well even though the FSI isn't...

Another Short Post

Top Line: Commodities were in the volatility ride on Tuesday with Oil and Gold both opening up and dropping into the close. Oil was up about $3 early but dropped such that it was down $3 by the end of the day. Gold really didn't open up much at all but ended down over $25 and is poised to drop more.

What was the News? That would be the news that the Fed Chairman thinks the economy is just fine and the Fed is now concerned about inflation and we should be expecting a rate hike, maybe a small one, at the next meeting in a few weeks. Meanwhile, the Democratic presidential candidate is telling Congress the economy is slowing and the government shouldn't wait for his presidency to do something now. Obama thinks the right amount would be $50 billion. Apparently, he thinks we should send this amount at about the same time the $160 billion is being sent out.

We are not really interested in the rhetoric, we just want to focus on how the market perceives the news. At this point, Obama does not carry the weight that Bernanke does. And, well, the bond market was not happy what with the threat of higher inflation and lower rates. What other item might be having trouble??? Well, that would be precious metals. Since they don't have children (as in, no interest) or other way to collect interest, they get sold in times of the threat of higher interest rates. What goes up with the threat of higher rates? Yes, you are correct, the Dollar.

We are sharing the email from last night here:

Okay, I'm just really freaking out about this economy...This is totally and utterly insane. The oil price increase on Friday was just so unbelievable. And of course, you know that will cause another huge increase in gas prices for us all (It's already taking affect). Talk is it'll be $4.25 easily by the end of the month. Wouldn't surprise me. ... It's frustrating for sure and everyone is being hit financially with the raised costs of EVERYTHING!!!! It's definitely not going to get any better anytime soon. Just don't know what to really expect for the future. It just looks so dismal!!!!!

This pretty much sums up the economy as a whole. People, who had very little to do with running up their debt or buying homes way out of their comfort zone, are the very same ones that are going to get hurt by this real estate downturn.

We wish we could give you more info this evening but we need to close down a little early. We'll try to put up a better post tomorrow.

FSI: 92.68 (small rally in the speculative issues)

Lost Our Post Tonight

Top Line: Monday's trading was a roller coaster with a lot of movement both up and down. The trading in the overnight futures seems to be telling us to look for more downside on Tuesday. Asia is trading down this evening probably catching up with Wall Street from Friday since several of the Asian markets were closed yesterday. All of this gives us the possibility of a down opening...which doesn't really mean much normally.

Today we received an email from one of our readers who said we could include some of the comments here in the blog. The reason for the addition of these comments is to provide some added insight into the basis for our position about the way the powers that be have taken us through the last couple of bubbles.

Sorry, about that...We had written a pretty good post but lost it in cyberspace :-( We'll try to bring the essence of the post to you tomorrow...it's too late to re-create this evening. Here are some pics that were part of the autosave, that apparently did not work...

Jason and Bennett ran a half marathon together on Saturday:

Steep Unemployment Jump, Steep Drop in Dow

Top Line: It seems the market has decided to go down. As the jobs' report came out on Friday morning there was a shocking number that seemed to get the most attention, that being the unemployment rate which jumped to 5.5% in May. From there, the stock market had a little trouble on Friday. We think it is just the beginning of the fresh decline that should last for a few months.

There was twisted logic going on again on Friday. The end result is that Oil jumped ten dollars and here's just how the traders figured it...With the jump in the unemployment rate, well, of course, this is news, anyway, with the jump in the rate to 5.5%, the immediate thought the traders had was that the Fed could be back in the game of decreasing rates again. This thinking led to the dollar going down some more and with the dollar dropping oil will be going up. This happened, oil popping ten bucks, right along side of Treasury bonds going up, this is an odd result. Twisted, indeed.

The prognosis for the stock market over the next couple of weeks is for more of the same, downside. The market has spoken, that it reversed on Friday morning, pretty much on cue as the unemployment number came out. With the turn in prices on Friday, there could be a strong selloff going into the next Fed meeting/end of the month.

We are now going to start following the VIX to see how deep this decline can go. The VIX seems to be poised to jump to much higher levels which is consistent with our short positions. The VIX will be an important indicator for us to follow to find an exit point. The VIX is a volatility index that indicates fear when it goes up. The higher the fear, the higher the VIX.

We see that there seems to be no fear this evening as the futures have found some footing and are rallying modestly as we write this post.

FSI: 93.68 (a similar drop here as in the major indexes)

We've added a few more Jackson pics this evening.

Here's one with uncle Jason:




Forget the Belmont, let's see the Doggies:



Smiling for the camera:

Jobs' Report Up Next

Top Line: Friday brings the much awaited (at least here at the Update, anyway) jobs' report. The optimism the stock market has shown the last two days reminds us that we always need to respect the wishes of the traders on any given day. We (still) think this up move is over right after the report comes out on Friday morning.

On Thursday, the stock market jumped on what appeared to be a move based on oil also jumping over $5. We have mentioned Several times that the move in the stock market and the oil market are driven by the same thing--liquidity. What that means is the dollars are floating around and need to find a home. The go into the stock market and oil, similarly. This being the typical bullish period of the month (the week or so before the employment report), we are not surprised by the two moving up together. Not happy about it either...

But, the up move did give us our chance to complete our deployment of idle cash. Right now, we have fully commited as much as we intend to the short side of the stock market. This up move should be a good opportunity to do this...but only time will tell.

The news items that the media deemed the ones that moved the market were fewer jobless claims than expected (this number comes out every Thursday morning and is called the weekly jobless claims) and also improved retail sales. The market wants to believe that the economy can come back from the brink of recession based on one weekly jobless claims figure or that retail sales will bounce back and stay higher after the "economic stimulus package" has been exhausted.

The key informaton for us is the 12,750 level in the Dow and it is still over our heads. We recall this evening the somber mood on Wall Street just before the JPM buyout of Bear Stearns. How many people had figured the market was going to go into a downward spiral and that was only a few months ago. That is all but forgotten now that the market is moving up, two days in a row.

We hate to bring the facts into the conversation but the market probably peaked back on May 19th when the Dow closed above 13,000. Since then the Dow has decisively broken through the 12,750 level and now is trading below it. Still bullish sentiment is at high levels and few believe the market can go down at all. The volatility indexes show near complete complacency at about the same level as the indexes were back at the highs in October.

We remain bearish...

CM, one of our regular readers, has provided us with a little reading material which, of course, lines up with our position on residential real estate leading the economic slowdown. In this article, we read that a milestone of one million homes are in some stage of foreclosure. We highly recommend reading this article because it points out the huge numbers which won't go away easily. Thanks, CM.

We had seen another article that shows how things became the way they did. This article puts the reality of the crisis in perspective. We quote the article here, "She acknowledged that she stated her monthly income as $7,500 on the loan application -- nearly double what she was actually earning in her job as a clerk at a food processing company and a second part-time job." With that stated income, she received an 80/20 loan (this is a loan that has a no insurance payment 80% first mortgage and a 20% home equity loan--so, no down payment is required) on a $412,000 house. The payment recently jumped $450 to $2,650, so it must have Also been an ARM...oh my.

Happy trading after the jobs' report...

FSI: 96.70 (just over last week's high but still down almost 10% on the year)

The Fly Has Appeared--Maybe It Has Red Wings

Top Line: Ok, maybe the down side move wasn't exactly "right straight ahead". This the "fly in the ointment" we were mentioning (and a hockey reference for you hockey fans, Red Wings win tonight in six). There are still some upside potentials out there but everytime the market decides to go up and can't hold it, the market losses its ability to get through prior resistance. So, we are still bearish, the only question is WHEN will it happen?

With Wednesday's rally pushing up strongly on the tech side of the house, the bears got a little scared especially at the day's highs. The blue chips had a much weaker rally than the techs. The banks took a hit on the day. The techs had giant gains during the peak of the rally about mid-day. In fact, we checked on the components of the NASDAQ 100 and we found that out of 100 companies only four were down about that time. By the end of the day there were a few more of them that were down.

On Friday they are still going to announce the jobs' report and we still think the high in the market will have been made at least by sometime Friday morning. Since the NASDAQ was so much stronger than the Dow on Wednesday and in fact the Dow actually closed down on the day. As contrarians we normally would think this is bullish but due to the position of the market we just think the market is trying to fool the people...yes, we still consider ourselves to be people.

The ADP came out with their estimate of jobs and that number was 40K and it was positive. The estimate for the Real jobs' report still is showing between 50K and 60K job losses for the month. Here we have a bit of a dichotomy with the ADP report, at least in the estimate. That doesn't mean the actual number will be that far off but we are interested in seeing if the ADP report needs to be given more credibility or not. Friday is coming.

During the day, the market was trying to remember what the Chairman of the Fed was talking about in the last few days. When the market broke off the rally this afternoon, his remarks from earlier in the week were blamed for it???

FSI: 94.51 (up but not by much)

Another Reversal to the Downside

Top Line: Tuesday's reversal qualifies as a "surprise to the downside" because there were several who thought the worst had been seen. The pattern in the market is still bearish and we continue to think more downside is right straight ahead.

The market opened with a grin and then got good news on the manufacturing front and tried to "jump" but didn't. Then about mid-day, the wheels sort of came off but the market recovered most of its losses going into the last 90 minutes of trading.

Where do we begin? There were a few standouts in the news that we wanted to report. First, Erick left us a comment on the housing market and we had to find the source of the story. Apparently, a builder is desparate to sell some high priced homes. If you bought a $1.6 million home in one location, he would Give you a second home valued at around $400K in another neighborhood. Erick was trying to imagine paying the taxes and insurance on both houses.

The other items were the Bernanke speech, the Toll Brothers (TOL) news, the manufacturing news, and GM to mention a few. The story we read tonight was about Ed McMahon, Johnny Carson's old sidekick. The story said that Mr. McMahon was having trouble making payments on his Beverly Hills mansion and that Countrywide Financial was seeking to foreclose.

It seems Mr. McMahon had run into some financial difficulties when he broke his neck about 18 months ago...here's the amazing stuff...so he was having trouble getting work. Mr. McMahon is 85 years old and his $4.8 million house was on the market but he was having difficulty selling it. He was $644K behind on the mortgage and had just received a $300K home equity line of credit, also from Countrywide. This is truly amazing stuff.

GM announced significantly lower sales and this seemed to prompt a selloff in the afternoon, which we don't really understand. Gas prices are at $4 across the country and GM is having trouble selling SUV's...Shocker. So, we don't really think that caused the selloff.

Earlier in the day Bernanke had been spouting off about the Fed being concerned that dollar weakness may be manifesting itself in higher inflation. We hate to break it to the Fed Chairman but isn't that the Definition of Inflation??? Like they are going to start getting tough on inflation now. They're the ones who helped the Dollar get weak in the first place with their constant cutting of interest rates. Still, the gold market fell in tandem with the oil, which was down about $3 on the session.

But, the most amazing story of Tuesday is the Toll Brothers (TOL) news. These guys are incredible. They are now whining that the government should be doing something to create housing demand. Let's see, what business is TOL in? Oh, that's right, housing. What are these guys doing?

Selling should be the name of the game...

FSI: 93.83 (not much sustainability in the FSI)

A Good Monday

Top Line: Monday, Monday...so good to me. Well, not all that good but a good start. The stock market more than likely has started its descent down to test the March lows. There is a fly in the ointment but otherwise the slide should continue.

That fly represents some late day strength in the market after a pretty harsh selloff earlier in the day. The big news item was that S&P downgraded some of the financials this afternoon, a few banks like C (Citibank), JPM (JP Morgan), and BAC (Bank of America) and a few investment banks, especially LEH (Lehman Brothers), MER (Merrill Lynch), and Morgan Stanley (MS). LEH was actually down about 7% on the day. The referenced article quotes S&P... “The outlooks on the large financial institutions sector in the U.S. are now predominantly negative."

Earlier in the day, an important index of manufacturing came out, the ISM report. It showed that manufacturing actually rose in the period??? but the number was still under the magic 50 number so contraction was still the order of the day. The market's reaction to this report was to show some strength initially but within about ten minutes the market fell out of bed.

Our position on the market is that we have seen the peak and today's (Monday's) action supported that view. As we said at the outset, there is still a possible fly in the ointment, that being downside nonconfirmation in the indexes--a bullish one at that. How bullish? Well, only as far as getting the market back up to around 12,750 again :-( but it would only be a short term pop. The primary move is down and whether that occurs Right Now or after a small rally should not really concern us. As we said in our last post, there is some dry powder that needs to be deployed so a little more rally would give us that opportunity--but we really don't want it.

Tomorrow (Tuesday) will give us better information.

Treasury bonds were strong today. The inverse relationship of bonds and stocks continued on Monday. We are short term bullish on bonds and are in the TLT's for a short term trade.

FSI: 95.01 (down with the market, not leading it like we had hoped)


In the mean time, we promised some more pictures of Jackson, so Finally here are some:

Here is Jackson all by himself in his "crib":



Just hangin' out with the old folks, those over six months old:



Jackson and Gramma are having a laugh together...



The Fearless Foursome after a round of golf...Jackson had already taken off his cap, it says "Chick Magnet" and he gets a lot of grief on the golf course until he tees off. Those 300 yard drives straight down the fairway tend to quiet those kinds of comments...Grampa needs to get those white legs out of sight, ouch.



And, ok, one brag shot...Top of the weight loss leader board for the week...done after 42 weeks.

Complacency Rules, as in, Is King

Top Line: With the month of May behind us, our short positions are mostly in place. We have some reason to think the rally may be over and, if not, will be over by Friday's report on jobs. Similarly, we purchased some T-bonds last week in the form of TLT. We still have a little powder dry and if any opportunities crop up this week, we'll try to take advantage of them.

The big event of the week will be the jobs' report due out on Friday. We don't think there is any reason to expect that it should have any particular impact on trading except that we think it just closes the window on any further upside in the stock market. Again, we have no reason to think this report holds anything important.

Looking at the stock market from last week, there seemed to be a steady upward movement in the major indexes. Our own FSI was up all four days. With it being the last week of the month, that shouldn't surprise us but we really thought there might have been a chance to get something different this monthend.

May did bring a good opportunity to sell. Remember the theme of sell in May and go away. That couldn't be a more true philosophy this year. Stocks should generally have trouble until September just a few weeks before the election. There could be some extreme rallies along the way but there should not be a rally back above where we are now.

And, where is that? The Dow is struggling to get back Up to the 12,750 level. That number has been a support or resistance level for quite a while now. Looking back to February of 2007, we can see the Dow bumping its head on 12,750 for the first time. Since then, we have seen several touch points on that level. The important point here is that the Dow has not advanced since Feb of 2007. People are still bullish...

That leads to the other item of interest, the volatility indexes. These indexes, VIX and VXO, have come back down to the level they were at back at the October highs. This means that traders do not seem to be any more concerned about a stock market drop now than the did back in October. You my recall that the Dow was trading just over 14,000 at that time. This is our classic definition of complacency...something we think coincides with this intermediate top in the major indexes.

We leave you with a couple of articles for reading. Both are from the NY Times and may come with a few ad's but the articles are pretty good. The first is about the higher end residential real estate market and the other is about the CDS market written by one of our favorite journalists, Gretchen Morgenson.

Thanks for the anecdote about the real estate market, Erick. The seven year break even point in real estate doesn't correspond well with the "real estate always goes up" theory. Real estate is going to be a problem for quite some time. Be careful.

FSI: 96.63 (still down 9% on the year, so far)

We were hoping to put up some additional pictures of Jackson but that will have to wait until tomorrow.

Friday Ramblings

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

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

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

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

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

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

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

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

Early Again

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

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

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

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

Perfectly Dangerous Rally

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

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

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

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

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

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

Downtrend Getting Underway

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

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

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

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

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

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

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

Dull Upside Action

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

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

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

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

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

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

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

FSI: 90.92 (just a little down from yesterday)

Below 12,750 and Confirmed by Our Own FSI

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

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

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

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

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

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

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

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

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

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

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

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

FSI: 91.22 (important reversal)

Surprising Downside Followthru

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

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

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

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

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

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

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

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

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

Key Reversal Day

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

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

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

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

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

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

FSI: 95.27 (not down much but Down)

No Direction

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

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

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

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

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

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

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

Bears Have Vanished

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

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

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

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

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

FSI: 95.90 (failed to make a new high)

More Confirmation of a High

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

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

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

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

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

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

Divergence in the Indexes

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

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

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

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

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

FSI: 95.98 (just a little bit of slippage)

12,750 Appears Again

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

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

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

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

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

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

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

FSI: 96.10 (pretty strong showing from the Horsemen)

Bearish Signs Are Emerging

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

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

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

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

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

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

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

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

Not a Wednesday Update After All

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

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

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

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

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

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

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

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

FSI Shows Early Signs of Weakness

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

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

Here are the headlines from today:

Oil Likely to Reach $150 to $200

Fannie Mae to Raise $6 Billion After Posting Loss

GE to Stop Financing Boat, Motor Home Purchases

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

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

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

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

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

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

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

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

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

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

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

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

April Job Loss: 20K

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

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

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

Apparently, It Wasn't Time

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

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

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

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

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

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

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