Giant PPI

Today didn’t look much like an up day.  In fact, it looked like a down day with the Dow down about 60 on the day going out at the low of the day.  A day like today is certainly not bullish.  We have talked about the oversold nature of the market and how it should bounce out of this past week’s low.  Well, after about three days of trying, it seems to have run out of gas.  With the market dropping today, our only thought is that if the lows of last week get violated we might be heading down in a hurry.  

We have mentioned several times in the past that crashes, or as they say in the politically correct world, nonlinear events, happen when markets can’t pull themselves out of oversold positions.  This is the time when investors get a little scared or Fear takes over.  We can’t say for sure that is what will happen but today’s market is definitely cause for concern.  Fortunately, we have moved into short positions and can enjoy a simple decline.  We did think there would be more opportunity this week to add to those positions or to lighten up on long positions.

After last week’s report for September CPI of a 1.2% increase, the most in 25 years, today we saw the PPI increase at a giant 1.9%, the most in 15 years.  The market doesn’t seem to be too worried about it but the numbers are big.  You would think the bond market would object to these big numbers too but it was up slightly today, too.  When these markets want to go up, they don’t go down anymore.  That doesn’t mean bonds can’t go down, just that they didn’t go down today.

Tonight INTC reported and the market was not overjoyed by the news as INTC dropped almost 80 cents after the news.  The news was that INTC sees some weakness in chip demand in the usually strong fourth quarter.  Yes, the quarter was good but the market doesn’t trade on yesterday’s news, it is forward looking and tonight, at least, the vision was not taken as bullish.

Overnight the NASDAQ 100 futures are trading lower, not significantly, but tomorrow morning is a long ways off.  Traders may like what they see in the morning light.  We will be anxious to see what develops tomorrow.  We have thought that the market would find a little footing here but today bodes badly for tomorrow and beyond.  If the market can finally get some traction tomorrow, we will not be surprised but it will mean that the bounce we have going may carry a little longer.  

I think that when most players think a rally is coming, including bears, there is a distinct possibility that one might not come.  This is a very bearish outcome, especially if the players have positioned themselves for a rally.  We wait to see what happens, with our short positions in place.  We put most of our short positions in place on October 3rd.

Dow Industrials:  10,285.26   -62.84
RYVNX:  22.42
TLT:  90.31

Monday Rally

The Dow pushed higher at the opening on news that GM’s profit was worse than expected and that stock popped by about 10% in the early going?  GM made some comments about cutting health care costs and the market liked that.  Later in the morning, Altria Group, formerly known as Philip Morris (MO) was up on the news of a favorable ruling from the Supreme Court.  The government tried to get the Court to review whether it could go after some of the prior profits of tobacco companies to pay some of the “fines” for the landmark ruling against the tobacco companies.  The Supreme Court denied the hearing.  Both stocks jumped large percentages today and with both of them part of the Dow, they pretty much made up the entire gain in that index with MMM (3M) up to finish out the 60 points.

Today’s stock market tried to go down in the morning but, by the end of the day, had a nice rally.  The Dow Industrials managed a nice 60 point move.  Starting at last Thursday’s rebound from the 10,150 area, the Dow has managed almost 200 points.  The biggest problem with the rally is the lack of volume associated with it.  And, today’s advancers were just a few better than the decliners at 1763-1499.  This is not exactly the kind of pop the bulls were hoping for today.  After all it is Monday.

We don’t think this rally will take the market up very far and should be over before the week is up.  You have been given a wonderful opportunity to exit more long positions before we see acceleration to the down side.  

As mentioned last night, we purchased TLT, the bond ETF.  The bond market had a decent pop at the opening and pushed the TLT to 90.61.  We decided to hold off our purchase until later in the day and were able to pick it up for 90.25 before it closed at 90.21.  We are content with the price we entered the trade.  Now we would like to see a move back to around 95.  We will keep you posted on our outlook.  We normally don’t like to bring bonds into the Wednesday Update but we make an exception this time with an ETF, which is technically a stock.

Gold was up today as well but failed to run past last week’s high.  We don’t expect much follow through and don’t think it can break last week’s high.  If it does, we are still not going to get long this commodity until we see it Drop about $50 or so.  For its part, the HUI managed to match Gold’s move today, up 5 points, but the HUI is well off its highs from a couple of weeks ago. Today it closed at 234.77 after being at 250.33 intraday on September 30th.  We are going to be very patient with this sector, but we are hoping to get back into it sometime later this year.  We’ll keep you posted.

Dow Industrials:  10,348.10   +60.76
RYVNX:   22.09  (still a good profit from 20.56)
TLT:  90.21  (Our entry point, 90.25)

Short Term Bounce?

Sunday evening and the market is having trouble figuring out what to do for Monday morning.  Monday’s generally tend to be up days and tomorrow may not be an exception.  We have seen a bit of a bounce in the past two days of trading so we need to watch for a good opportunity to add to our short positions or sell into that strength.

Without good information that the market will deliver Monday, I am not sure how high this rally can bounce.  The futures are showing no movement in either direction tonight so I don’t think anyone else has much idea what’s going on tomorrow either.  We do know that the market is oversold in the near term based on the very negative numbers it generated last week.  More importantly, the market is giving you another opportunity to sell into some strength.  We think of it as a little gift from Mr. Market.

We hope you have had a chance to look at some of the free material over at the web site we mentioned the other day, elliottwave.com.  They seem to think the rally will carry the Dow back up near the 10,400 area but also say that if we see it below last week’s low of 10,156 then we should consider the next leg down to be under way.  

The two web sites, elliottwave in their Short Term Update and true contrarian, are both suggesting that bonds look to be ready to have a short term bounce.  We have noticed the 10 year treasury is at a relative high rate of near 4.5%.  We are considering taking advice from the three of us and purchasing Treasury bonds or funds that invest in Treasury securities.  The ETF, Exchange Traded Fund, that concentrates on Treasuries is TLT and we think it may have a 5% bounce in it.  It closed at 90.23 on Friday and could rally back near 95.  

Both of these websites offer additional information and are especially aligned with the way we think right now.  For their perspective please use the links provided in the blog, one at the left for the True Contrarian and the other one in the text of the October 12th post.  The elliotwave Short Term Update was posted on Friday evening and another one will be posted Monday evening.  Their free posts are only available until Wednesday afternoon so take advantage of that offer.  We recommend the October Financial Forecast as well as the Short Term Update.

Dow Industrials:   10,287.34   +70.75
RYVNX:  22.24

Was This an Up Day?

The market tried to have an up day and I guess in the NASDAQ we did see a bit of a rally. We should expect some up days just to keep some of the bears, like us, guessing. The stock market, as I measure the Dow Industrials, is now in an oversold position. The past few days have served to push the indicators down but have pretty much left the prices in the Dow intact. This kind of thing will happen on a short term basis, but long term the market is destined to drop.

We are going to keep the post “short” this evening. We will be watching for a rally to sell into as this market keeps everybody guessing. We don’t expect anything like a move back to 10,500, but we do expect a modest rally that could occur at any time. Today’s mini-rally was fairly sharp and qualifies as an opportunity to sell with the Dow up about 80 points in an hour after lunch. In spite of the big rally in the Dow, the breadth (gainers and losers as well as upside and downside volume) was negative today as the broad market struggled to get positive. Sometimes this happens on the second day, as in tomorrow but we think the market is decidedly weak and rallies will be sold.

Still, the message of the market is clear, down ahead. Keep this direction in mind as we head into the weekend and early next week. Mostly, rallies will get sold and the market will continue to buckle under the downside pressure.

We repeat, we do not find any major sectors of the market worth being long. The opportunities are on the short side. If you can’t “bear” going into a short fund, then head into cash for some protection. Those of you who want to hedge your long positions should do so with a protective put strategy. This is not the time to be long but if you must be, buy some protection by purchasing some of the inverse funds we have mentioned or buying puts on the securities you own. ASK questions in the comment section. We will answer them as soon as possible, normally within a day unless we’re in California or something like that.

Speaking of that, no there is no significance to an inside up day. It could lead to an outside down day and that is a different story, a bearish one.

Dow Industrials: 10,216.59 -0.32 (big move)
RYVNX: 22.55 (modest loss today)

Time to Consider

The stock market is now facing its destiny, or density—name that movie. The leadership in the market has disappeared and stocks are ready to take a trip South. You say, “We’ve been going South for a long time.” Well, by my count, we have only been down for a couple of weeks that are noticeable. The question is “How long is it before we get a meaningful bounce?” The answer lies in the following question: “How fearful are you personally about the market dropping?”

By the looks of things in the stock market there is very little fear right now. We need to see a bit of a selloff before we could approach a significant, tradable low. And, even at that, we may not have seen the ultimate low in prices as normally price lows happen on much less emotion. So, did you answer the question, Very or Not much? I expect the answer to be, Not much for many if not most market participants.

We received a comment on yesterday’s blog asking if there was still time to get into (more) short positions. Our friend Erick was specific on the short index funds that track the Dow or the NASDAQ 100, the later of which we own in the form of the RYVNX.

We normally ask this type of question (we sure have a lot of questions and answers tonight) when we are holding a stock or thinking of buying it. If you wouldn’t buy it, then why do you hold it? But, let’s get specific…

The stock market has just shown us signs of weakening and we expect some significant selling over the next week to ten days. For us traders, we may take some short profits if we get a good selloff. If not, and there is a bounce that would give us another opportunity to sell some more. The only problem with getting in now is that you need to consider your exit strategy which may need implementing in less than two weeks.

Most of you are not used to dealing with short term positions like this but this is the time for a major drop in the stock market and when that drop comes it will be fast and furious. Then, we will want to get back into cash to decide whether or not to go long. We may consider going long if we get a deep enough correction.

Make no mistake, this move down will be the beginning of a very deep selloff that may take several years to accomplish. We don’t want to be long into any of this decline. So far we’ve fared well with our RYVNX. In my personal accounts I may decide to get a little more short. Right now there is an obvious downside target if you look at the charts. We should see another 5% from here in the next ten days. I am giving you the perspective of the end of the first leg down. We think the move down will take us to the end of November before we find a good tradable low.

Keep coming back here for further refinements to this call.

Moving to gold: The last two days probably marked a top in the gold. We have seen a very strong up move in the precious metals but in the last few weeks it’s been without the requisite move in the, gold mining stocks as measured by the HUI. As gold has been tracing out new highs for the move, the HUI is failing to confirm the move. Over the past several weeks the HUI traded as high as 250 but in the last couple days has only managed to get back to about 245. This is the type of action we generally pay attention to given that we believe the mining stocks lead the metals. To confirm the move down in gold, the dollar seems to have found some support and could rally again. These two don’t necessarily move opposite directions every day but they should trend opposite.

We are taking a bold approach here and recommending the sale of all gold and gold mining stocks tonight. We like the long term outlook for gold but we can’t justify being in an asset that looks like it’s about to go down hard. In fact, we might recommend adding one or two mining stocks to our short list. Since you don’t do that type of thing, you should make sure that your portfolio is now void of mining stocks, at least for the time being. If we see a change, we will immediately let you know here.

I guess it’s Wednesday night and I am writing with my normal Wednesday Update ramble, but I want to emphasize that you should consider getting lighter on your stock exposure here. We don’t know of a single major industry that should be purchased at the moment and that is typical of a downturn. For those of you who are bears with me, we have been waiting for this move for over a year and now it’s here. We need to miss the decline at a minimum and capitalize on it at best. I haven’t been this adamant about the prospects of a major selloff until the last couple of weeks. There is significant evidence for an imminent decline:

Interest rates are now trending up, bond market has probably seen its top (early June)
Oil is still at lofty levels
Market volume has picked up in this decline
Complacency, no fear, is still prevalent even in the face of this decline
The housing engine has slowed considerably
The saber rattling for a tax overhaul that would reduce the mortgage interest deduction
Mother Nature is wrecking havoc
Prospects for an expensive heating season are high
Consumer confidence is down

You can probably come up with your own list but the facts are there. The social mood is about to undergo a sea change with the stock market being immediately affected. With that in mind, we have a great opportunity for you to learn more about this from the people who write about it most often, Elliott Wave International. Their website is: http://www.elliottwave.com/ and today they started free week on their site. This means that you can get some valuable information that normally would cost you about $75 a month for free for a week. You will need to register as a EWI Club member but that is free and gives you access to a lot of good information. I highly recommend the October Issue of the Financial Forecast and then also the Short Term Update that gets published on Wednesday, Friday and Monday.

With that I will finally sign off and leave you to your thoughts. This down turn has a long ways to go just based on how big this top is. You will recall that the Dow has been within striking distance of 10,500 for the better part of two years, so there is a lot of complacency out there and a couple hundred points is not going to cure it. Yes, the market is oversold but that is when we see some of the biggest selloffs. If stocks convince people that they are going down, they will go down hard and that is just what we think, down hard. If you have any doubts about what to do, go look at the charts of the stocks you own and make your own decision (use bigcharts.com in the left column). Go back and review some of the posts to this blog for additional information and post a comment/question if you like.

Dow Industrials: 10,216.91 -36.26
RYVNX: 22.91 (up 11% so far)

Yes, the movie is "Back to the Future".

Market Trying to PUT in an Up Day

We hope you have enjoyed the little downturn we have had over the past couple of weeks. The Dow has dropped over 300 points this month, so far, with undoubtedly more to come. We should expect a bounce of some measurable magnitude but so far every rally seems to be sold. The market is near being oversold and that has normally been the recipe for a sharp upturn in prices. This time around we are seeing some buying interest at times and then it just leaks away.

We note that last week the market volume was fairly chunky during the decline. On Friday with the jobs report so good, the market managed some strong upside volume but had no follow through on Monday. Monday’s usually are the up day of the week but not this week.

With the Dow sitting precariously over the 10,000 level, traders have to be wondering if that will really hold, but so far so good. We don’t think it can hold so we continue to be short, realizing a short term bounce has to be coming soon. We don’t think that is absolutely necessary because we know that market dislocations can happen when the market is oversold, which it is close to now.

We would be Very surprised if the Dow made an attempt to get back to the 10,500 level before going down in earnest. The broader market seems much weaker than the Dow so when the Dow finally gets in gear on the downside and the broader market fails to confirm, we will start getting an idea when to cover our shorts. There seems to be some time for that to occur both in terms of price and time.

For now, we just bide our time and wait for a good opportunity to cover. When that day comes we may be able to set up some nice long positions that will do well for us. Until then, we just wait.

The Gold sector has not done much on the downside like we originally thought might happen. As you can tell, it hasn’t gone up or down much since we moved out of that sector. We do keep a close eye on it.

The other area of interest is the foreign markets, particularly Japan, although we’ve seen some strong moves already and don’t want to chase it too much. We will watch and you wait, together we’ll make some good trades.

Dow Industrials: 10,253.17 +14.41
RYVNX: 22.37 (a nice move so far)

GM Drags Down Stocks

Just a quick note this evening: The market has been having some trouble with correcting the drop we saw last week. The big news last week was the jobs report that showed a much better picture than was expected. Today, being Monday, we saw a very ugly drop in the market when we usually expect a little attempt at a rally. GM got spanked to the tune of about 10% on news that it might get some drag from Delphi after their bankruptcy filing. Some feel that GM is only a couple of steps away from bankruptcy themselves. The old saying used to be “as GM goes, so goes the stock market”, not a very good omen. GM is back down to the lows it set in April which are the lowest prices for GM since 1992. This stock has not been such a good "buy and hold" stock.

We will have a full post tomorrow evening but thought we’d get a short one out there tonight just to let you know we are still here. Our positions have done fine while we were gone so we are not concerned about them. We feel there is more to this downside and if we don’t get a fairly good rally soon, the market will collapse under the weight of the sell orders that will come in. We are in wait mode tonight even though we saw a pretty rough Monday today.

Dow Industrials: 10,238.76 -53.55
RYVNX: 22.15 (not a bad move so far from 20.56)

Possible Dislocation Approaches

What can I say? The market has perfectly followed what it said it wanted to do and that is “go down”. We got that in spades today as the Dow dropped about 124 points to cap off a 250 point drop in the last three days. We don’t have a good feeling about the way the market is trading, that is to say, we think the market is about to drop hard. There really is nothing to support it technically at this point. On top of that, the market fundamentals are weak.

I don’t really think there was a lot of fear today so the selling was contained, not panic selling. Market participants think they can just go ahead and ride out any drop since we haven’t really had a convincing drop for a long time. Today did show signs of no support under the market as the Dow dropped to a low not seen since July 7th, and the same is true for the NASDAQ COMP and the SP500. That is called three months of overhead supply, meaning anyone who bought in the last three months is losing money. Admittedly, not every stock is lower than it’s been in the past three months but the indexes are at three month lows, so many stocks are, too.

We note that the oil complex was down today, too. Is that supposed to be bullish? While the precious metals were firm, the HUI, our gold mining stock index took a beating, causing our little gold mining mutual fund, BGEIX, to drop to 12.64, so far we're glad we took profits. Like I said, we will keep watching it for opportunities.

Right now, our “short” position has done fairly well in the two days we have owned it. The RYVNX fund that we paid 20.56 on Monday is now at 21.45 for a nice 4.3% profit. We did have to pay a commission in our account but maybe you didn’t. Either way, the profit is significant in just two days. We don’t think there is any real reason to worry about the position as we think the market has a ways to go before this is over. We have been waiting for this for about two years so we’re going to enjoy it.

Dow Industrials: 10,317.36 -123.75 (10,500 is a memory)
RYVNX: 21.45

The Wednesday Update may not have another post until next week. We are going to be on vacation and may not be able to post anything to the blog. The latest we should return will be Tuesday evening for a Wednesday morning post but we could post occasionally in the next few days if conditions warrant. We don’t think the market is going to go against us for several weeks even though we might get an up day or two along the way. We still would stay the course, the “short” course, that is. Take Care and we will be back soon.

No Time For Complacency

What a difference a day can make! Last night as we were writing the post, there was still a little bit of a question about the near term of the market. Tonight we have seen another significant reversal of fortunes in the market. Putting these two days together you get a very bearish picture. The news was that the Dallas Fed president Richard Fisher said the Fed needed to stay the course in its fight against inflation. So, if the market truly sold off due to that news, we should see a good rebound Wednesday. Otherwise, maybe it wasn’t the news after all but a weak market. We will soon know, even if we don’t know Wednesday.

In other news, the New York Times had a front page article on the New York housing market saying that is had stalled a little bit. In the past quarter, the average sales prices had dropped 12.7% but that year over year they had still risen 10%. One other key point was that that the time it took to sell a home was up 30.4% in the last quarter. And, as a side comment, the article mentioned that the insiders at big home builders have sold almost $1 billion worth of stock this year... The cracks are beginning to appear...

Looking at our current favorite index, NDX, the NASDAQ 100, we get a good idea of the kind of day we had. If you look at the (java) chart, the most important chart tonight is the six month daily chart and here are the highlights as we see them. Back on August 2nd and 3rd, the NDX traded at 1628, the highest levels since the end of the year highs around 1635. On September 13th, the NDX traded to a high of 1619. These are the last two pronounced highs in this index. Today we saw a big move up in the morning to take the index up to almost 1618. There it seemed to hit a brick wall; we call it resistance, the resistance that two prior peaks created. The point being that it failed to get back to the previous high on both occasions. The same type of chart pattern exists on the SPX (SP500) and the INDU (Dow Industrials).

There are few other notes about this chart. If you consider a trendline, and you can actually draw it in with bigcharts.com, from the April 29th low spike through the July 7th low and then through the August 29th low, you will see that trendline broken decisively on September 21st. Then we see the market rally back up through the line and today it broke down through it again. This is another bearish chart pattern.

If you were to put in the 2 SMA (Simple Moving Averages) lines for 50 and 200 days like we usually do, you will see that the 200 day line has started down sometime around mid-month. This is just something else to notice. You shouldn’t buy a stock with a downward trending 200 day SMA, why should you own the index?

The last thing to look at is today’s key reversal (on heavy volume--not shown on the chart). You may want to pick a shorter time frame to see it closely but this is an outside down day, another very bearish chart pattern. An outside down day is the market peaking higher than the day before but closing below the prior day’s low price.

Well, the NDX has tipped its hand a little today. There does seem to be some underlying weakness in prices. We choose to get into the RYVNX inverse fund based on the NDX without seeing the last two days of trading because the evidence is mounting that the market is ready to roll over. Now that we’ve seen the past two days we are much more confident in our call.

If the long anticipation of a bullish stock market over the next few months turns into a downturn right here, then there are a number of traders on the wrong side of the move and there could be some serious dislocation. This could develop quickly. Please don’t wait too long to decide.

Dow Industrials: 10,441.11 -94.37 (Say good bye to 10,500 on 10-5)
RYVNX: 20.82 (not a bad first day)

October Begins

Today was a picture perfect start to our forecasted October.  We saw a nice rally at the start of the day and then a fade with another rally to test the highs of the first rally and then a drop into the close.  For traders, this is a very nice bearish day.  This being the first day of the month, we should have seen a pretty strong day and we saw a modestly up day.  The market is tired and is ready to go down.  The momentum indicators we follow have not come up much in this little rally we had over the past week and just that is almost enough to give us courage.  We expect a down move here over the course of the next six to ten weeks with possibly a tradable low sometime around late November.  

Today’s news was dominated by the September ISM manufacturing report which showed an increase in the face of an expected downturn.  This did not make the bond market very happy and it traded down.  Of course, the dollar was up due to the market’s interpretation that interest rates would keep going up and that would mean dollar assets would be sought after.  The market’s wisdom is a little misguided sometimes.  Since we have taken our profits in the precious metals sector we aren’t going to argue.  We would like to see a pullback in that sector so we can get back into it later.

Then there was the other story about car, or should we say SUV and pickup, sales at GM and Ford, although they weren’t really picking up at all.  The slowdown was attributed to two things, one being the “employee discounts” that were offered in the months before and therefore reducing demand now.  And, the other being the surge in gas prices and some aversion to purchasing gas guzzlers.  Whatever the news, the market wants to go down.  Let’s get on that trade.  And speaking of that…

Just as a matter of record, we are going to report here tonight the early morning prices of the stocks we mentioned in our post last night.  The market was very generous this morning, allowing us to add to our short positions on a nice up opening.  While we may still see some upside over the next day or two, we are getting what we consider to be fairly good prices for our shorts.  Last night we mentioned several stocks and funds and for stocks we list the price about a half an hour into the trading session and for the two mutual funds, the only price available which is the asset value at the end of the day:

Low risk tolerance:
RYAIX    23.00

Moderate risk tolerance:
RYVNX    20.56
INTC         24.90      close      24.60
GOOG     316           close   318.68  (one little stinker)
RIMM        69          close     68.10
YHOO       34           close     33.76
JPM           34.40      close     34.19
AMAT       17.20      close     16.98
MER           62.40     close     62.19

High risk tolerance:
We mentioned that we would be available for questions on the options strategies.  We don’t think most of you should get involved with speculative option positions, but we do recommend a strategy if you are unable to sell your positions, covered calls or protective puts.  Again, let me know if you have any questions, put them anonymously in the comment section for all of us to read and comment.

Dow Industrials:  10,535.48   -33.22
RYVNX:  20.56   (our entry point as we mentioned last night)

The Time is Now

The Time is here and we are reviewing our normal investments for opportunities.  We have been patient for long enough and we are ready to dive into the market with some short positions.  The end of last week brought with it a good rally for us to trade.  The Dow Industrials is again in the 10,500’s and we just don’t think something like that can hold out much longer.  

In fact we are pretty certain that the much awaited “correction” will happen over the next month or two.  The US stock market has seen complacency in the face of quite bad news in the past couple of years and we must now act to preserve our liquid assets.  In the next few days we are going to see some reaction in the market.  You ask me how I know.  The reason I know is that the market is telling me.  Since early August the stock market has been struggling and now it is moving up again.  We had an interim peak in early September as traders (?) assumed Katrina would spur economic activity in the rebuilding effort.  Now later in the month we see another spurt higher but failing to actually get as high as the Katrina rally and falling far short of the August high.

The stock market is telling us in no uncertain terms that this near term rally is about over and the next big move will be down.  The hurricanes may have delayed the onset of real selling due to widespread, but probably misplaced, optimism about the “positive” effects of the hurricanes on the US economy.  

At the very least there is complacency enough to go around several times.  With the Dow sitting on 10,500 for the better part of two years, the stock market has had time to build a very significant top.  The major question is “What do I do?”  The answer is to get yourself away from stock market exposure.  If you want to participate in the downside of the market, then you need to determine your risk tolerance and how much of your capital you want to risk.  These are important points because you want to balance your risk tolerance with your ability to invest.  

For those of you who want to participate in the downside, there are several levels of trading that you can do.  First, which is a low level of risk, is to buy an inverse fund like we have been talking about for a while.  We follow the NDX (or the QQQQ’s) and think a good place to be is in the RYAIX which provides return inverse to the NDX.  That means if the NDX goes down, the fund value goes up.  What a concept!

For more aggressive short funds in the RYDEX family, you can purchase 200% inverse funds, like the RYVNX fund.  This fund provides twice the move that the RYAIX provides and both are in the opposite direction of the NDX.  This one tends to move quite a bit and may not be suitable for you.  Check your overall risk tolerance first before investing in any of these techniques. (We begin tracking the RYVNX fund on this site for the next couple of months.  We have purchased some already and are looking to add to the position on Monday.)  

Second, which is an average level of risk, you can short some stocks.  You may want to consult me before doing this, as this strategy is fairly risky.  You need to be able to protect yourself from loss and you can do this in various ways.  We can discuss via email or just use the comment section so everyone can get involved.  You don’t even have to leave your name.  We will figure out your questions.  We would recommend shorting stocks like INTC, GOOG, RIMM, YHOO, and our other favorite JPM.  There are several others too like AMAT and MER.  

Third, which is a higher level of risk is trading options directly.  This is something you should probably ask more about in the comments and probably shouldn’t actually do.  But, the most aggressive, a place where you can make a good return, strategy when the market is moving is to be in options.  We think options strategies could be used for a number of lesser risk positions too but we need to talk about them.  

Right now we need to focus on two things:  eliminating stock market exposure and possibly adding some exposure to the short side.  Hopefully the week will give us some good opportunities.

Dow Industrials:  10,568.70  +15.92  (five up days in a row)
BGEIX:  13.41  (last day of tracking this here—we will follow it but not report)
RYVNX:  20.65

End of Quarter is Here

The market finally decided to have an up day.  The news was not particularly bullish but the quarter is drawing to a close and we still have to have our rally so we did.  The first report on the market tonight was “traders were hard pressed to come up with a reason for the rally”, noteworthy press.  

But, now what?  The market wants us to believe it has the capability of rallying but has shown very little strength until today.  So, how strong was today?  The market is managing to work off its oversold condition.  With the big move we saw today, guess what, the Dow Industrials made it back into the 10,500 range again.  We figured this week it would try to do that and today it succeeded.  The end of quarter and end of mutual fund fiscal years are upon us tomorrow so the usual stocks need to move up so that the money managers can show what a good year they had.  Yes, sarcasm.  

This being the last post of the week as we wait until next week to put on any new positions, we thought we would keep it short due to the low level of news out there.  But, the one item that seems to escape the country is that Rita made a pretty good sized dent in the energy producers in the Gulf.  The Wall Street Journal will have an article titled “Gulf Energy Facilities Get Off To a Slow Restart After Storms”.  The article gives some thoughts about what is going on in the real energy market, where the energy is produced not in the financial market.  The article mentions that the undersecretary of energy thinks “consumers need to know” that heating your homes will cost about 50% more than last year.  The reason they “need to know” is so “they can take steps to do something about it”.  What exactly does he think we can do, move south where heating your home is not really necessary?  Thanks for the tip Mr. Undersecretary of Energy.

The precious metals sector was on fire today as it continues to out perform the broader market.  We of course are out of our position and today was the first day that we are disappointed about it.  Oh well, we will have another chance at this sector again very soon.  And, if not, we will have other opportunities.  

Have a good weekend and we’ll see you back here on Sunday evening.

Dow Industrials:  10,552.78   +79.69
BGEIX:  13.55   (oh well, I guess we left a little on the table)

Natural Gas

Last night when I finished up the post, I realized that I had forgotten to mention natural gas. Yes, FNM dropped 10% but natural gas made up for it by jumping 10% yesterday. So, when you wonder if the hurricanes might have disrupted things at the refineries, that is a pretty clear indication. The price of oil has not risen too much over the past few weeks but the prices of Processed energy products like gas and natural gas have been climbing, with natural gas the clear leader in price increases although heating oil is right behind. Natural gas has risen an eye popping 100% since last year at this time. This means that home owners, especially those of us in the north land, will see a substantial increase in the price of heating our homes this winter. I guess I'll wear a sweater. We had 37 degrees here over night so we are "fall"ing into winter already.

FNM Drops Another 10%

The August durable goods orders surprised to the upside, up 3.3% over July, with expectations of only 0.8%.  So, the economy is giving mixed signals and we need to be able to decide what it all means.  We do that by looking at prices of stocks.  

With that in mind, let’s take a look at one of our friends, Fannie Mae, FNM.  We know it’s a little self serving to the bears but we mentioned last week (in Thursday’s post) that FNM and WMT had not gotten much press on the prices of their stocks making multi-year lows.  Well, today FNM did make the news as its stock plunged over 10% after more news about its accounting came to light.  

The real stock prices are measured in the averages that we watch and the Dow Industrials have now posted three up days in a row, even though the total move in those three days is only 53.50 points.  We had talked about the positioning for a bounce as we headed into the end of the quarter and that the market had gotten a bit oversold.  Well, tonight the market has now released some of the oversold position and the little rally, or non-rally, we have had has given us a much better neutral situation.  

We are probably going to be sorry about this decision but we have put off our new positions until next week assuming that the market will find some way of closing stronger into the end of the quarter.  

Meanwhile, the Japanese market has quietly moved higher since the lows of May.  As measured by the Nikkei 225, that market is up about 20% in that period.  We had hoped to catch a little ride on the foreign markets after the Dow Industrials dropped so we will keep our eye on this market for sure.  The Nikkei 225 is trading near 13,500 after bottoming out just under 8,000 in 2003.  We want to remind you that this market traded near 40,000 back in 1989.  We think the Japanese market is the key foreign market to watch.  The European markets are ok also but the Japanese market has shown some good strength after over a decade of declining prices.

Dow Industrials:  10,473.09  +16.88
BGEIX: 13.27

Two Reports Disappoint

The market struggled again today as two big news items appeared, consumer confidence and August new home sales, both not so good.  Consumer confidence fell or plunged to 86.6 from last month’s 105.6 with expectations of a drop only to 95.  This is the largest drop in confidence since back in 1990 when Iraq invaded Kuwait, at least some of you might remember that period of time.  This drop is even more than the drop after 9-11.  And, this is the lowest level of confidence in two years, 81.7 back in October of 2003.  The confidence number is based on current information and does reflect some impact from the two hurricanes and possibly other things like the last rate hike from the Fed.  People are worried about the future and that means we may just have a shift in the way they view their lives.  

The other number is the new home sales for August.  This represents activity Prior to the hurricanes, or should we say lower activity.  New homes sales came in about 10% lower than July and fell more than expectations of a 2% drop.  The numbers are not staggering but, when taken in the context that they were before the hurricanes, they take on a much greater significance.  

We here at the Wednesday Update are all over these two numbers because they fit into our thought process for the near term.  The cracks are starting to appear in housing which in turn will lead to less available cash from the big ATM people live in.  That is what we have been patiently expecting.  The confluence of so many problems for the economy are beginning to surface right now just in time for October and a steep drop in stocks.  As I think of the housing situation and all of the many veins of the economy that run through it, I am reminded of an army walking in line and the front guy bends over to tie his shoe and the chain reaction of people piling into him.  Housing sales dropping is like the front row in the parade bending down to tie their shoes.  We are still watching this unfold but the picture is getting clearer.

We are very bearish as you can tell.  The market has tried to stop going down so hard the last few days which could be construed as a temporary stop gap before prices really slide.  The end of the month, end of the quarter phenomenon better hurry as we keep marching toward the end of the week.  Can you envision a scenario of higher stock prices in this environment???  I sure can’t.  

The Fed is on a course to increase rates further.  Oil prices are near record highs.  The stock market has put in and tested some solid highs and has fallen off since then.  The government is trying to run a war in Iraq and a domestic bailout program here at home in the Gulf, not to mention the budget and trade deficits we already have.  The housing market is slowly rolling over—this is the key.  I guess a bull could spin these items to a bullish conclusion, that’s what makes the market move in different directions.

We have some short positions and are ready to move more funds into short positions.  We get to the end of the month and wonder if we will see any bounce in the market going into these normally bullish time periods.  The drop could come at any time including the “bullish” time of the month so we need to make a commitment to something.  So, tomorrow we will.  Always put off till tomorrow the difficult tasks, you never know, you might come up with a better solution.  In the mean time, happy trading.

Dow Industrials:  10,456.21   +12.58  (just a matter of time)
BGEIX:  13.00  (we’re just watching this now)

Oil Can't Stay Down

Today saw a very poor start to the final week of September in the stock market.  After the initial fireworks that pushed the Dow up about 80 points we saw a bunch of back and forth action for the next several hours.  Around mid-day the market headed south such that the Dow was actually negative briefly but managed to rally to close up about 24 points.  I don’t think that was what the bulls had expected going into the day.  There were a few bears who didn’t think so either.  

Oil, which had dropped so much on Friday, about $2.50 a barrel, decided to rally today and pretty much retraced the full decline.  It had been down in Sunday’s special trading session and then on Monday it traded down under $63 but from there it moved up about three dollars to close near $66.  The damage was limited but petroleum supplies got tighter.  That didn’t sit too well with the market.  

It did sit well with precious metals as they opened down fairly hard but rallied massively over the course of the day.  Good thing we’re out, still with the sarcasm.  The HUI did roll over with the market into the last half of the day and, I might add, didn’t close higher than when we sold our BGEIX position and didn’t trade as high as last Monday.  The resistance around 240 in the index seems fairly strong.  We are hoping to see it drop a little before we think about getting back in.

The bond market made it two down days in a row and look to have failed in an attempt to rally higher.  We still contend that the high in the bond market happened in early June with a failed test in early July and another failed test in early September.  The question now is can it break support near the 4.5% level.   (Bonds trade lower to cause rates to rise.)  One thing that bothered the bond market (and us stock market bears) was the news on existing home sales which increased by 2% last month.  I guess we’ll have to wait to see what the hurricanes did to these sales next month.  

The stock market traded very poorly today and the bears won the day.  As we mentioned last night, the market is oversold and is still trading poorly.  We are at the end of the month so it should be trading fairly strong but it’s not.  We are near the end of the quarter and basically the end of the mutual funds year, and it is still trading poorly.  The market seems to want to go down.  We are bearish.

Dow Industrials:  10,443.63   +24.04  (failed to hold the 10,500 hit this morning)
BGEIX:  13.27  (still below our exit point of 13.34)

Will Drop in Oil Spur a Rally in Stocks?

Here we are in the wake of Rita and the world is breathing a sigh of relief. New Orleans is flooded again but the new damage due to Rita seems mild compared to forecasts. Great fears that may have pushed gas prices up had Rita damaged enough of the refineries in the area, were eased along with oil in a special Sunday trading session this weekend.

What does all of this mean? We think there will be a significant short term effect due to these two hurricanes as we direct many resources into rebuilding the Gulf coast. The market probably thinks the possible economic activity in that region will give a near term rally as early as Monday morning. The futures are not really indicating that too much tonight as they are only up a modest amount. That’s not to say by morning we won’t have more bullishness on display but just that the euphoria of Rita’s weakened hit (this just sounds wrong) hasn’t really pushed the market up much.

Oil and precious metals have taken a tumble since the middle of last week including gold being down over three dollars tonight. We are comfortable having exited our precious metal exposure, at least tonight. Oil, after pushing over $70 in advance Katrina, could only manage about $68 in front of Rita. Tonight oil is trading in the $63 range. You know how we feel about failed rallies—look for more weakness in oil short term.

Gold took a breather since last week after trading almost $480 an ounce it is trading under $465 tonight. We think it could drop to $455 at a minimum. We will watch patiently for another entry point.

As for the stock market, we see stocks on a precipice again. The market has not managed to recover from the selling, on good volume, we saw over the past couple of weeks. Our indicators are getting a bit oversold but… We have said many times that an oversold market is a breeding ground for fear and panic selling. Right now, there seems to be some optimism on the reports from Rita but if the market can’t capitalize on them right now, we think our near term forecast is right on target—lower into October.

We are at a natural point for the market to bounce, though, since it is a bit oversold but we don’t think it’s an easy tradable low. The main concern is the position the market is in. It is possible for a small bounce but we think that bounce should be sold, if it develops. The next big move will be down and it should occur over the next six weeks or so. I don’t think trying to time it any closer than that will help much. Just, do what you think is right.

The bond market had a difficult day on Friday pushing the yield on the ten year Treasury up to 4.25%. We just keep watching for signs of a slow down in the credit expansion. From all reports, it just hasn’t happened quite yet. We will keep a look out. Monday morning brings the August existing home sales report, maybe another good clue. The problem is that the stock market seems to be going down without full confirmation of a slow down in the credit expansion anyway. That may be our best clue after all. We will see.

Dow Industrials: 10,419.59 -2.46 ( 10,500??? Can it happen?)
BGEIX: 13.08 (we are out at 13.34)

PS The blog has 1000 hits. Thanks for coming back.

Buy the Bad News

We’re wondering how the stock market managed to stay positive through the news of the day.  This morning we heard that the leading economic indicators (LEI) fell for the second month in a row.  The drops of 0.1% followed by 0.2% don’t seem too bad but they were taken before Katrina hit.  You can read the article in the Wall Street Journal tomorrow.  

This news was coupled with the fact that jobless claims surged as the fallout from Katrina starts to take full effect on the economic numbers.  Last week’s number was revised strongly upward and this week’s number is the highest since July of 2003.  Now we are just waiting for the other fierce lady, Rita, in the Gulf to hit land.  Traders seem to be thinking it doesn’t really matter what happens.  Today, Rita was reduced to a Category 4 and reports were that it might drop to Category 3, you know, with winds only about 125 mph, before it actually gets to land.  

Other news was that Delta would be cutting up to 9,000 jobs after declaring bankruptcy, this in an effort to improve their financial condition during the bankruptcy.  

In other stock news, we find it interesting that in the face of all of the complacency there are two big stocks that haven’t gotten very much attention in this market, WMT and FNM.  We have mentioned both before in these pages but let’s take another look at their trading of late.  Walmart has just made a new 52 week low today but did close up on the day today.  The WMT is now trading at a price that has most everyone who owns it losing money.  Fannie Mae is not quite the same but fairly close as it has made a multiyear low in the past month.  FNM started out the year just over 70 and today closed at 46 while WMT started the year around 53 and closed at 43 tonight.  Have you seen anything about these price facts in the media?  These are huge stocks in the Retail and Mortgage markets, two big consumer plays.  We just keep wondering when the consumer will be tapped out.

Then tonight after the bell, Oracle, ORCL, a stock we haven’t mentioned too much here, announced earnings and disappointed.  The stock lost a little in after hours trading but not very much.  We’ll see what it will cause in the market tomorrow.  

So far, our exit of BGEIX, one day, has been an ok decision.  I should have mentioned that I sold out of PAAS yesterday as well.  Now, we will concentrate on the short part of the market and keep an eye on the precious metal sector for opportunities.

We recommend getting out of stocks if you haven’t done so already.  Last night we said we are looking for a big drop right now.  Today gave you a nice lift in prices to take advantage of them.  

Kudos to the Tipster, who saw CMTL jump on earnings news today to a pre-split value of 60.  CMTL is a stock we mentioned some time ago and it has had a volatile ride but today it broke out and made some all time new highs.  

Dow Industrials:  10,422.05  +44.02  (can it fight back to 10,500?)
BGEIX:  13.16  (it’s a habit)

Going Down

After making the decision to get out of our gold mining mutual fund last night, we watched with relief as the precious metals complex enjoyed a strong early rally. By the end of the day, the HUI, closing at 243.22, had recovered much of what it had lost since early Monday morning when it traded as 246.84. In fact, the close is the highest close in the HUI index since last November. With that high in place as of the close today, the BGEIX fund closed at 13.34, just a penny shy of the year high of 13.35 also set in November of last year. We are very happy to report that we were able to turn a tidy 37% profit since our entry point on May 23rd.

Enough of that, we have other business to take care of now. The stock market is very dangerous right now. The trading in the past few days has given us a good signal that the next move will be strongly down. The market leaders, housing stocks, have gone into a down move while the broader market has been moving sideways at best for the past several months, if not years, we don’t even want to talk about it.

We are now suggesting that the market should be avoided or sold. Those of you who have been sitting there on the fence or have been bullish, it is time to move. This is not the time to be bullish. The market has turned over and now is headed down. We can only hope that you have taken some money off the table as we waited for the market to go down. The stock market has managed to rally off the April lows near 10,000 in the Dow and now it wants to go down and at least test those lows.

For those of you who haven’t seen a major down move in the market, I think you are about to see one now. You all know that I am cautiously bearish most of the time but not tonight. Tonight, I am outright Bearish and am looking for a big drop right now.

We have talked about the market dropping into October for the last several months. We have said we didn’t really know what would cause the drop but we knew something would be blamed for the drop. So, the catalyst is a combination of several events like a rate hike sandwiched between two big hurricanes plus some other, not so prominent, news items.

Well, October is about a week away and the market is giving us a good signal that we should heed. There is so much complacency in the market but please don’t be complacent now. If you are in a 401(k) account, you have no tax consequences to releasing your assets from market exposure. If you are in taxable accounts, you have more difficult decisions to deal with, but we don’t think you should hesitate, even though you probably will.

If you have questions, simply put them out in the comment section. If you want to remain anonymous, you don’t even have to leave your name. We will try to answer any questions you might have.

In any event, protect yourself and trade well.

Dow Industrials: 10,378.03 -103.49 (well under 10,500)
BGEIX: 13.34 (our exit point, nice 37% trade)

The Fed Moves

Today, the Fed announced, as it has for the past 11 meetings (or was that innings—extra innings) that it was raising interest rates 25 bps and that it would continue to raise at a measured pace. The market put on a brave face right after the announcement but soon fell off to close decidedly negative on the day. The market opened strong but couldn’t keep it going to long after the announcement and then the market went down. We did notice that the volume was pretty chunky.

Today’s Fed news did manage to hit the precious metal complex. As we have been mentioning in the past several weeks, the HUI should find some resistance near the 240 level and it did. Yesterday’s opening was a classic from our perspective. The metals and the mining stocks saw a big pop on a Monday morning and then both fell all day long. Today after the interest rate pop they tanked even more much to our dismay. We were hoping to get out of our mining stock mutual fund closer to the 240 range but it was not to be. After trading over 246 early Monday, the HUI closed near 233 today with probably some more downside to come.

With that in mind, we are trading out of the BGEIX for now. Whatever we get for it on Wednesday will be our exit point. Since we got in near the low for the year at 9.71, we think we will have a fairly decent trade. We are not abandoning BGEIX because we fully intend to get back into it when conditions warrant it. It was a fun ride since May.

As for the stock market, we like our early August high call. Right now there appears to be confirmation that the market wants to go down. As you know, we are keeping a keen eye on the housing arena due to that being the heart of the credit expansion. Today we saw another crack appear in that housing starts were lower than expected. Yes, they were still very high but the rollover may be in place. We look for much lower stock prices into next month—at least.

Have a good day.

Dow Industrials: 10,481.52 -76.11 (below 10,500)
BGEIX: 12.90

Federal Reserve Tuesday

Well, Tuesday is a big day with the Fed making its petty little 25 bps bump in short term interest rates which gets even us a little lathered up. It used to be that Fed moves were done on a surprise basis but over the past year and a half they have been designed to not be a surprise. This semi-manipulation of rates serves to create an environment of “safety” to those who trade along the “curve”, giving everyone ample time to unwind from any difficult carry trade situations. Meanwhile, the financial system creates more and more credit and kind of ignores the Fed and its moves. The bond market has basically ignored rising inflation because…well we don’t know exactly but…the Fed has set up a no lose situation for bond traders by “fighting inflation” in their baby step fashion.

Enough ranting, but there really isn’t much to talk about tonight again as we wait for news on the Fed front tomorrow. I think the market wants to go down so maybe the move tomorrow will produce some down side action. Today’s downside action was attributed to the 7% spike in oil prices taking crude back up $4 to just over $67.

The precious metals were up strongly today but the HUI failed to go up in concert and our fund dropped a little today. The resistance at HUI 240 must be there. We will concentrate on this situation and keep you informed as to the near term direction. Ideally, we would see a modest pullback in prices and then find a good low to buy. But, we don’t always get what we want.

See you after the Fed’s bump. We advise caution after the bump because we might see a bit of volatility for a few hours of trading. We think the next move of consequence is down. Since the Dow is still in the 10,500’s we don’t see much upside. Hard to believe.


Dow Industrials: 10,557.63 -84.31
BGEIX: 13.18

PS If you are looking for Sunday evening's post, I accidentally wrote over it with this one. I guess the patting on the back was not supposed to have been done. Oh well. See you back here tomorrow.

Promises Promises

There are several items in the news today, Bush’s speech on New Orleans tonight, CPI this morning, jobless claims among others. Which of these deserves some attention in a market blog? Well, the CPI, being up 0.5% or about 6% on an annual basis, is swept under the rug by referring to the “core” rate at 0.1% which was below expectations of 0.2%. The CPI was not lost on the bond market, however, as it dropped enough to notice even in this boring market. The jobless claims out this morning were well above expectations but that was discounted because the increase was due to Katrina.

That leaves us with the Bush speech tonight. I don’t really want to discuss what we should or should not do for New Orleans. I just listen to numbers like $200 billion and think it’s a big number. The market needs to assess how that kind of aid will affect the future direction it may take.

In this country we already have a sea of debt so I suppose another $200 billion can’t hurt too much but I think the market might not think that way. The catalyst to drive this market down could be something that is just enough to push it over, the proverbial straw that broke the camel’s back. The weight of borrowing this much money to pay for the relief effort in New Orleans is certainly something the bond market was not counting on just three weeks ago.

If the bond market falters during this “financing” period, or call it credit expansion, we will see the scenario mentioned in these pages many times. Interest rates go up and housing prices finally turn down. We have already seen the housing market kind of flatten out and we have been watching that high in the bond market set the first week of June. That high is still standing as a barrier to lower interest rates.

We can’t help but think about the big Fed meeting next week and what might be deliberated there. Would they consider pausing in their rate hikes due to the speech tonight and the incredible amount of money that will need to be borrowed to pay for the rebuilding of New Orleans? The inflection point may be upon us.

There are so many things falling into place for a drop in the stock market. Yesterday we saw the break in the NASDAQ up trend line. We can’t forget to mention Gold tonight since it pushed to a 17 year high during trading today, that on inflation expectations, imagine that. We have been calling for a lower market in October and feel that is almost inevitable with everything going on right now. We hope you are positioning your portfolio to sidestep the coming drop.

Have a great weekend.

Dow Industrials: 10,558.75 +13.85 (let’s see, yes it’s in the 10,500’s again)
BGEIX: 12.78 (nice, now up over 30%)

Uh Oh

Well, well, well, every dog has his day.  Today the stock market took a little shot, the NASDAQ a little more than the Dow, but both had negative days.  Not only that, the precious metals sector was on fire with the HUI up almost 5%.  Nice day indeed.  The NASDAQ had a very bad day breaking its up trend line solidly today.  This is not a bullish sign for the near term.  Our bearish stance, on tech and financials, was solidified greatly today.  But, like normal, the futures are up over night.  Go figure.

As speculated here last night, two big airlines declared bankruptcy today, one right after the other, Delta and Northwest.  I don’t follow DAL but have followed NWAC.  I live here in Apple Valley and their headquarters are in Eagan which is right next to us.  I have some friends that work there, both in the air and at their corporate headquarters in Eagan.  And, I fly NWA all the time.  Anyway, NWAC has not performed very well over the last several years, particularly after 9-11.  After peaking around 65 in the late 90’s, NWAC dropped to around 30 and then near 20 just before 9-11.  Then it dropped to about 10 before rallying to around 20.  From there it has mostly been on a down hill slide.  

Yesterday NWAC traded most of the early part of the day right around 3.25 before realizing that news on the bankruptcy was imminent. The stock traded 100 million shares on Tuesday and most of that in the last hour and a half.  Today it traded almost 80 million shares during the day and almost 15 million after the bell right after the news actually hit the wires.

The other news of the day was Retail Sales dropping 2.1%, the largest drop since November, 2001.  Does that date sound familiar, right after 9-11?  Of course, all of the talk was about how car sales were depressing the number.  This was Before Katrina and During the giant employee discount period.  But there was a bright shining moment if you take out car sales—why not take them out?  If you take cars out of the comparisons, retail sales were up 1.0% so not to worry.

But, an even better spin story is this(and I’m not using sarcasm here in case you can’t recognize when I am or not):  The Fed watches retail sales figures and Greenspan will probably be knitting his brow as to what to do with interest rates next week.  We have said for several months that the Fed would stop sometime and may even start to lower given a weak economy.

As Bill Fleckenstein says, the Fed runs monetary policy based on the applause meter.  If the stock market is ok, then monetary policy must be ok.  We still think they have to raise another quarter point next week when they meet but that may well be the last if we don’t start seeing stronger numbers from the economy.  We are going into the fall here and Christmas Holiday sales are key to the retail market.

We are somewhat impressed by the comeback in the precious metals sector today.  Yes, gold was up about $4 but the HUI was up over 10 which gives us some breathing room to the upside.  We do see a little resistance on the chart up around 240 and we need to think about lightening up on our positions when we hit that number.  The HUI is about 225 tonight so we haven’t got too far to go to get to 240.  We are watching this market very carefully.  (We are very happy that we picked this up near the low in May.)

Dow Industrials:  10,544.90  -52.54  (still in the 10,500’s, how long?)
BGEIX:  12.55 (new relative high, in at 9.70)

PPI for August, Up or Flat?

PPI for August jumped up 0.6%, after being up 1.0% in July, but the core rate was unchanged leading to a headline on CNN that read “Wholesale prices in check”.  Well, you know my attitude on this subject.  Inflation is running much higher than reported.

The other news today was Best Buy (BBY) getting clocked for about 10% after a disappointing outlook for future revenues.  And, tonight, Northwest Airlines, NWAC, along with Delta Airlines, DAL, are probably going to file for bankruptcy as early as Wednesday.  This story has intensified after the fuel prices rose in the wake of Katrina, but according to the PPI we don’t have any inflation problem.  There I go again.

Not much to report this evening except we did have a down day in the market today including the precious metals sector.  Right now we are just managing to keep one eye on this dull market.  As soon as we stop watching, it will move.  Catch 22.

Dow Industrials:  10,597.44  -85.50  (no surprise, we’re back in the 10,500’s)
BGEIX:   12.11

Monday Market, Up Slightly

Tonight we have very little new information about the direction of the market.  It was a Monday and it was fairly flat.  The bond market did take a little hit which should start to be noticed over in the stock market.  Complacency rules in the stock market.  

Next week we get another look at what the Fed has to say about interest rates and it should be sort of comical to see what they say.  They are obviously in an unusual position with wanting to raise rates and at the same time seeing the New Orleans situation.  My current guess is that the Fed will raise another quarter point when it meets next week.  What this will do to the market is anyone’s guess.  

The market wants so desperately to be bullish regardless of the news.  This is due to the heavy liquidity being thrown at the market in the wake of Katrina.  This is the same type of thing that happened right after 9-11.  This time it is in the midst of rate hikes but it still has the same reaction in the marketplace, rally in stocks.

We still think that we are pushing up against a fairly solid ceiling.  If we do break through, the break could be a short covering affair with a violent conclusion on the down side.  We don’t like that scenario but it is possible.  If it happens in the next week to match up with the Fed’s meeting, at least there will be a news event to mark a high.

I’m trying to be patient and pick a good solid top to short.  In the mean time, we are happy with our little gold mutual fund with was down a penny today after a new relative high on Friday.  We look for more upside in the near term.

Dow Industrials:  10,682.94  +4.38
BGEIX:  12.32

Koizumi Rules (Sounds Cool)

The big news over the weekend was across the sea in Japan where the Japanese Prime Minister, Junichiro Koizumi, received broad support of his ideas for reform.  Last month the parliament turned down his plan to privatize the post office, which actually manages about 25% of the household savings.  Koizumi took his plan to the people who overwhelmingly voted to give him authority to make the changes he wants.  Koizumi is widely thought to be the one to overhaul the Japanese structural problems that have plagued the country for fifteen years.  

The Japanese stock market has reached a four year high and could be the best place to invest our money.  We have hoped that the world economies would follow the US economy down into the fall and then we could invest in the international market.  This particular event could mark an intermediate top in that market but we have been keen on the ETF, EWJ, for a couple of years.  We will take a harder look at it after we see a good break in the US market.

Speaking of the US market, stocks decided to stage another rally and break the Wednesday highs that we thought might hold.  Well, with the Japanese celebrating tonight the US futures are also partying a little, not much but a little.  It is Monday and the market likes to kick off the week with a little upside mostly that we want to sell into at this point.  

The mining stocks decided to participate in Friday’s rally and gave us a new relative high in that complex as measured by the HUI.  The HUI set a closing high in mid-August at 217.85 and Friday it closed at 220.23.  Meanwhile, the little gold fund, BGEIX, we follow made a new high as well at 12.33, after being at 12.13 for a mid-August high.  You may recall that we got you in at 9.71 on May 23 (check the archives for the Sunday evening post for May 22) for a gain of nearly 27%.  We continue to hold.

This looks to be an exciting week in the stock market as we have seen the Dow push back to its summer highs.  The resistance should hold due to the lack of solid momentum in the market as well as the NASDAQ indexes still quite a ways from their August highs.  There is significant overhead resistance here and we think it will hold.  With our forecast of much lower markets into October, we better see something in the way of downside pretty soon.  Have a good week of trading and come back here everyday for our latest thoughts on the market.

Dow Industrials:   10,678.56  +82.63
BGEIX:  12.33

NFL Starts Play Tonight

And so it begins, the new season of the NFL.  I know, I know, this is a stock market blog but I do miss the fantasy league from the last few years.  Hope you all got the teams you were hoping for.  Good luck.

Ok, back to the stock market, which was struggling a bit today.  The Dow poked its head above the 10,600 mark yesterday but today it couldn’t hold it.  Yesterday could indeed be the high for the move as marked by the peak in the 5 day upside volume indicator.  After this big run, there is some reason to believe that the move is over and we are about to head down in earnest.  

The trouble is that the market seems to be in suspended animation.  We have the occasional day like the other day, up 140 points but for the most part the market is treading water and it has been doing it for the past 20 months.  

Tonight we heard from some of the tech companies, like INTC and TXN (Texas Instruments).  Both companies had positive things to say but INTC was down after the announcement and TXN was up.  AMD (Advanced Micro Devices) has been competing strongly against INTC for a while now and the last few days has seen its stock up nicely.  After trading in a fairly tight range between 20 and 21 for the last month and a half, it has had a nice pop the last three days closing at just over 23.  

Have a nice weekend and we’ll see you back here on Sunday evening, Monday morning to you.  

Dow Industrials:  10,595.93   -37.57  (back into the 10,500’s, surprise surprise)
BGEIX:  12.03  (back over 12)

Another Dull Day in Stock Land

Not much to report this evening due to the dull day we had again today.  One item of note is that FNM (Fannie Mae) made a multiyear low in trading today.  FNM is an important mortgage component in the housing arena.  The weak trading this past year in FNM portends some trouble in housing, just one more item to keep an eye on as we watch the credit expansion start to slow.  

One of the items we mentioned yesterday was that the market seems to have put Katrina behind it, at least as far as the negative side goes.  The market seemed to have the notion that the Fed was going to slow the increases in interest rates, so therefore, let’s buy ‘em.  This is happening even as bond prices are going down (increasing interest rates).

Today, Chicago’s Fed President Michael Moscow hinted that the Fed probably needs to continue to increase rates to combat inflation.  He seemed to think that there is not as much slack in the economy as there was last year and inflation pressures are mounting.  I guess they don’t really think housing inflation counts.  The news is affecting the futures in overnight trading with the futures down but just by a little.

On a technical note, our favorite topping indicator, the 5 day upside volume, has pushed to an overbought high today.  This could represent a high in the market all by itself.  We have been looking for a high to short into this week, one that falls short of the early August highs.  I would say today fits that bill.

Dow Industrials:  10,633.50   +44.26   (don’t look for this over 10,500 to continue)
BGEIX:  11.80

Not So Much Trouble Today

The stock market showed some strength today as we get September off to a good start for the bulls.  Today’s rally in the Dow pushed right up through the 200 day and 50 day SMA’s.  Last week we said that the market has been so flat recently that there really isn’t much movement in either direction but the drop below 10,500 could be meaningful.  Well, tonight we are back above that 10,500 and looking straight at the 10,600.

We have the late July, early August highs around 10,700 providing some overhead supply, resistance.  But, the key facts to look at for today are that this is a typical retracement of the down move we have seen since the mid-summer highs.  It’s based on low volume, at least today, and looks like an ending type move on the sheer price move of 141 points in the Dow.  These are headline, head turning numbers that the public sees in conjunction with the energy prices going down a bit.  Today’s headline on CNN was “A Well-Oiled Rally” just to give you an example.

We said last week that we wanted to wait until this week to get short and we like a day like today to do just that.  There are no shortages of “reasons” for the market to keep going up so we ask “How can it?”  We still engage in contrary thinking in case you were wondering.

The conclusion the market has come to is that Katrina and falling energy prices allow or force the Fed to stop raising interest rates.  The bond market didn’t agree today because it dropped, with interest rates moving up somewhat.  Don’t forget that those early June highs in the bond market are still providing some strong resistance to bonds.  

Precious metals actually like an environment of low or negative real interest rates.  This is the situation that could present itself if the Fed does stop raising rates and inflation continues to climb.  So, you have some pretty good choices, either buy mining stocks or silver or sell stocks (Short—by utilizing the RYDEX funds where possible).

We look for the stock market to “hit the wall” tomorrow and maybe put up some stronger volume as supply again meets demand.

Dow Industrials:  10,589.24    +141.87    (10,500  boring)
BGEIX:  11.83

Happy New Year

Welcome to the start of a new year of trading. We are so looking forward to trading this market over the next year as many good opportunities are now presenting themselves and we should be in a good position to take advantage of them.

Last Friday the jobs report showed a modest increase of 169k new jobs created. At the same time the unemployment rate dropped to 4.9%. I don’t think that the New Orleans area will contribute good numbers to employment over the next few months. Who knows how the market thinks about the economic and financial consequences of Katrina. As I write this the bulls are driving up the futures in overnight trading so at least these traders think the worst is behind us as far as Katrina is concerned.

We take a far different view and have the opinion that the market will struggle over the next few months. Any distraction the Fed may have during this time will be over shadowed by the giant shrinking credit machine. We have repeatedly stated that the reduction in credit will push the market down due to housing cooling. More as it develops.

The precious metals arena has again become the focus for the Wednesday Update as we see a significant low being put in last week. Friday’s commitment of traders’ report showed some bullish accumulation by the commercials in both silver and gold corresponding very well with the bounce we saw in the HUI last week. A similar move happened over in the dollar except in the other direction. The dollar has broken down in the past several days and has blown through support. We mentioned earlier in the year that the dollar would go at least as high as the high 80’s and it seems to have peaked near 90.5 and now is back into the mid 80’s. Everything looks good for the precious metals fundamentally and technically speaking. (For more info please read the True Contrarian on the link to the left.)

Our position is to sell stocks into any rallies that develop and to buy precious metals. We should see some good performance from both of those strategies over the intermediate term. The stock market is in serious trouble over the short term.

Dow Industrials: 10,447.37 -12.26
BGEIX: 11.92

September has Slow Start

September 1st didn’t provide much in the way of bullish moves for the stock market, well, except for precious metals, more about that below. For stocks, the day’s action was a bit volatile but with a downward bias. Volume was again stronger than we’ve seen this month but not as strong as yesterday. With this being the stronger part of the month, we haven’t seen a big push up.

You may think we have been discounting Katrina in this discussion. Well, for some reason the market doesn’t seem to think that Katrina’s aftermath is much to worry about. Yes, gas prices are up but the day to day life is going on in the rest of the world. Relief efforts are slowly coming to the New Orleans region but as it relates to the market, there doesn’t really seem to be any visible trouble. Stocks have managed to shrug off $70 oil so what’s $3 gas, apparently not much to the market.

We have been sort of waiting for next week before initiating any additional shorts but this market seems very weak even with the chunky volume of the last two days. It almost looks like there has been a bit of easing in the somewhat oversold situation the market has found itself in the last week or so.

The place that bothers us most is the mining stocks. We saw the support near 200 for the HUI index and now are looking back with dismay that we didn’t add to our position during that dip. On Tuesday the HUI closed under 200 at 198.79 and today it closed at 213.43 about a seven percent move in two days. PAAS, our silver mining stock traded as low as 14.87 on Tuesday but closed today at 16.37 for a 10 percent move if you could have caught the low, not likely. We saw the BGEIX gold mutual fund print an 11.19 on Tuesday evening this week and tonight it closed at 11.90.

This move in the HUI correlates to a steep drop in the dollar the last two days. This trend should be watched closely as it should give some clues to what the bond market will do. In the convoluted way that the market thinks these days, the dollar's logic goes something like this. With Katrina, there is some feeling that the Fed will have to stop raising rates. What was the headline on CNN, "Will Katrina make Greenspan pause?" I didn't even read the article but this is the type of thing that makes Katrina bullish in the stock market--the logic lacks a little if you are truly looking at Katrina for what she is, a deadly storm with long term negative implications for the economy and the country as a whole.

Well, tonight is the last Post for the week. We will post something Monday evening when we return from the long weekend. We trust your weekend holds something special for you. Have a good one and we’ll be back next week.

By the way, Happy New Year, for those of you who know my thoughts on the start of the year being the Labor Day weekend. It has to do with getting ready for a new school year. It seems this year is the first year in a long time that there hasn’t been someone in our house going back to school in the fall.

Dow Industrials: 10,459.63 - 21.97 (continues below 10,500)
BGEIX: 11.90

End of the Month Surge

The economic news of the day includes the GDP and the Chicago PMI, not to mention the continued disaster in the New Orleans area. This morning we got the latest revision on the second quarter GDP and it was down 0.1% at 3.3% from the last estimate of 3.4%. Meanwhile, in more current news, the Chicago Purchasing Managers Index fell significantly from 63.5 last month to 49.5 this month after estimates of 60.5 to 61.5. This is an index that indicates contraction when it’s under 50 and it’s under 50. The news is generally not too positive around the country but the stock market bulls seem to think in the back of their minds that the Fed will certainly have to stop raising rates.

The bond market has had a stunning rally the last two days with the ten year dropping back to 4% today. We discussed the possibility of a bond rally that would be contained by the highs set back on the June jobs report. The futures price back then was just over 119½. Since then we have seen prices drop to a low around 113¾. Today’s high of 118½ is pushing up to the limit of where we think it should go.

The great credit expansion can continue with rates dropping the last two days. We have discussed this many times this summer that we think that rates would come down a bit but that the credit expansion would subside. We didn’t know what would do it but now we can see a little more clearly. The wake of Katrina will be wide.

One item of concern is the price of natural gas. This is the last day of August, not a month you would normally think about natural gas but here we are bringing it up. The price of natural gas has spiked this week along with the other petroleum products. The price of natural gas dropped to a low around 6.50 back in May and tonight it is 11.50. Last winter’s spike high was around 7.50 and it spiked again in early April just over 8. Basically, you can expect about a double in the price of heating your home this winter over last winter. And, still bonds rally (lowering interest rates).

Today the stock market enjoyed the last trading day of the month and rallied the Dow almost 70 points, but not back to the 10,500 level. The volume was heavy at 1.8 billion shares on the NYSE. Some might think this is the start of the uptrend that the bulls are hoping for going into the fall. So, we offer up a slightly less bullish opinion, surprising don’t you think?

We remind you of the turn down in the Dow’s 50 day and 200 day SMA. The levels of those two averages are just overhead at 10,530 and 10,538 respectively. These averages serve as a bit of a ceiling on the prices. Not that the market can’t break those ceilings, just that there is some resistance overhead in terms of the SMA’s, not to mention the general overhead supply in that 10,500 to 10,600 range.

Mining stocks surged back to life today as the HUI jumped 7 points and that 200 level does look like some fairly good support. Keep it coming.

Dow Industrials: 10,481.60 + 68.78
BGEIX: 11.46

Katrina Still Lethal

The stock market had to deal with some more news from Katrina today but, like Monday, found some support when the August Consumer Confidence numbers came out better than expected at 105.6. This number seems a little out of place at the moment due to the price of gas, which has rallied 60 cents in the last two days, and the effects of the hurricane. These numbers reflect data prior to the weekend but still could have given some strength to the market. The Dow tried to maintain down 50 for about a half an hour before giving way to more selling.

At mid-morning a bottom was found that launched a 60 point run in the Dow in the middle of the day. Then the minutes to the Fed’s August meeting were released indicating the possibility of further tightening due to the threat of inflation. That news item pushed the Dow back to fresh lows for the session around 10,350. This level has provided some support to the Dow over the past several trading days and it did today, too, as the Dow climbed over 60 points again to close down only 50.

The news on Katrina continues to push gas prices up due to three troubled refineries in Louisiana. The burst in gas prices must be an over reaction but it is definitely something to have to deal with at the pump for the near term.

Tomorrow is the end of the month and normally would provide some strength to the market. Neither are we are convinced that September will be as strong as some have suggested. Of course, the same obvious bullish patterns normally develop during this time of the month and just ahead of a holiday. We aren’t going to get too excited just yet.

Erick has left us some good information out in the comments to yesterday’s post. He is talking about heavy insider sales of the homebuilders. Take a look and thanks Erick.

The precious metals didn’t have a very good day today with gold down over six dollars today. The HUI was not down nearly that much so it might be finding support here around 200. We may consider buying more mining stocks or BGEIX if things start looking oversold in this arena.

Dow Industrials: 10,412.82 -50.23
BGEIX: 11.19 (ouch)

Turn Around Monday

Well, the market did manage to shrug off Katrina after a mildly negative opening. The market found some support this morning and Monday became an up day just because.

Not much other news today except that the Dow did not manage to climb the required 70 points and the 200 day SMA has now managed to turn over. This is not a strong endorsement for a good down move but it does give added bearishness, at least on the surface. That 10,500 number is again pretty close and, with the momentum generated today, we could easily see it again tomorrow.

The two SMA's that we follow on the Dow are now both pointing down and the 50 day has pierced the 200 day to the downside. Normally, this is significantly bearish especially with the Dow itself below both of those lines but in this case, with the Dow still hanging around 10,500, we need to be patient and watch carefully for other signs of market weakness.

The volume today was fairly light and the summer volume doldrums seem to be the normal course for the market here in late August. Over the next week, the bulls are looking to grab some power to the upside and with today's reversal, even on low volume, they could get some follow through on today's mini-reversal. They do need to get some volume going next week in order to see any significant push to the upside. We are not so sure. Last year volume was light in August and September with better volume showing up in October when the Dow made its last solid low near 9750.

Dow Industrials: 10,463.05 +65.76
BGEIX: 11.36

Katrina Rings Bell

Last Thursday we wondered if anyone could stay awake when the market traded so quietly as to not disturb anyone, bull or bear. Katrina has changed that tonight, what a woman! She has turned into a category 5 hurricane after being over the Gulf today and is threatening to hit New Orleans by the time you read this in the morning. Meanwhile, New Orleans has been mostly evacuated today with the warning of devastating wind and water. The reports I saw tonight indicated that last year's Charley, a category 4 storm, was much smaller than Katrina. Charley made its way through Florida and all the way up the east coast while Katrina is probably going to slam into New Orleans and lose a lot of power over land but only after she does her damage. The effects of Katrina may be felt for a long time. Anyway, you can find about her on your own, but you came here to find out about the market. Katrina has changed significantly in the past few days as it relates to the markets.

Last week, the news was that Katrina would not be much of a threat to the oil producers in the Gulf of Mexico. Today, that thinking is being significantly challenged as the path and strength of Katrina have both proved it wrong. As I checked the oil market tonight, it had traded above $70 with a jolt of over $3 tonight. And, gas had jumped about 25 cents a gallon. Both having broken out over their respective highs of the past month. Back at the stock market ranch, the futures, although somewhat better now at about 10 pm CDT, were down strongly indicating a bit of a drop in the market at the open on Monday. These things don't always hold overnight but the potential for a down Monday morning is pretty strong tonight.

We gave you what has been a pretty good call on the stock market peak in early August. On Friday the market, in terms of the Dow, broke under the 10,400 figure... say it ain't so. We have seen the Dow trade between 10,500 and 10,700 for the better part of July and August so there is some fairly good overhead supply above the market which should put a pretty tight lid on any upside over the near term. The Dow's 200 day SMA has still not turned down but it is pretty much flat. With any negative close tomorrow and even a positive close, as long as it wasn't more than 70 points, will cause the 200 day SMA to actually turn down. This would help confirm the down move we have been expecting since the beginning of the month.

The down move tonight has some basis in Katrina but when trading starts in the morning there is the downward pitch of the market doing its own pushing that will make for more interesting trading than Thursday last week. There seems to be a natural reaction for traders to let the market drop in the morning and then buy it back especially on Monday's. This week there is a strong bias to the downside built into the market and this "natural reaction" may not actually happen.

We are short and continue to believe the market has much more to go on the downside. I realize we are near the end of the month and near the Labor Day holiday, both good reasons for a bit of strength but when the market wants to go down, well it will. We will be back here tomorrow evening to review the happenings of Monday's trading which could be fairly volatile. Hopefully, we can make better sense of it after the day's trading is done. Since we are short we are not too concerned about any downdraft.

In the background of Katrina is gold and the other precious metals. They are up tonight but the trader's commitments from last week were not any better than the week before. We might be given a little rally tomorrow as the markets try to figure out the right path but we are getting somewhat concerned about our mutual fund, BGEIX. We have a nice profit in it and want to preserve it as much as possible. We were thinking it could rally to the highs of the year but we are getting more skeptical by the day. Stay tuned.

Dow Industrials: 10,397.29 -53.34 (Lowest close since July 7th)
BGEIX: 11.32

PS Last Friday's news seems trivial in comparison to the latest news but Greenspan did make some comments about the housing market that we probably agree with for a change of pace.

But my favorite line goes like this: "History has not dealt kindly with the aftermath of protracted periods of low risk premiums." Greenspan

Who would have protracted periods of low risk premiums, if not he and the FED?

Is Anyone Awake?

Today was one of those days that you just want to be somewhere else. The market was about as dull as it could be and trading was light. For it's part, the Dow traded in a very narrow 35 point range today and it looks like the patient is in a flat line situation again. The participants are waiting for the Labor Day holiday to defibrillate this market. With the end of the month again in plain sight, we could have some strength but the Dow has shown remarkable weakness since Monday's intraday high near 10,650, closing at 10,450 today. (A close below 10,500, that's two days in a row.)

One other sort of interesting thing with the Dow being under 10,500 is the position of the SMA's with both the 50 day and 200 day being right on top of each other at 10,539. The Dow is now below that and can start to pull them down and in fact has pulled the 50 day down but has only managed to flatten the 200 day. OK, so it's not so exciting but it does beat the trading day today.

The other exciting thing today was our prolific Erick in the comment. He is giving all of us some reminders about the way the Japanese economy faltered in the last fifteen years. He mentions liquidity drying up as one of the possible catalysts to a bust. Hot markets, like real estate now and the NASDAQ craziness of the late 90's, generate their own liquidity. But, in the times of a downturn, the liquidity does dry up. This will be part of the next downturn as real estate will become one of those dried up liquidity holes.

The other driver for a bust was a shock to the system like an oil or currency crisis. Well, let's see, the oil shock doesn't seem to have done too much so far as people continue to live life pretty much as they always have. Maybe their use of credit is up a bit but that won't affect their monthly payments too much for a while.

A currency crisis is also a definite possibility as the dollar is having a little trouble right now and has for several years. Will the Euro or the Yen be able to compete with it or not? The Chinese have already set the tone for less dollar assets when it changed the value of the yuan.

Don't forget that Japanese real estate, residential, has dropped 70% in the last 15 years. You have heard the arguments about the fact that "they aren't making any more land" in order to convince yourself that real estate prices can only go up. Well, Japan is not very big and their population has grown in the last 15 years but what about real estate? We believe that the housing market in the US could stand a little cooling off but 70% seems scary to us.

Real estate is a big worry here at the Wednesday Update because of its hold on the whole economy. The real economy is the real estate market which is part of the financial economy. We can only watch and pay down as much debt as possible.

Thanks Erick.

Dow Industrials: 10,450.63 + 15.76
BGEIX: 11.34