Wednesday, August 31. 2005
No Typo
We’ll find out soon if this rally in stocks has legs. The market was strong late in the day on the last day of the month where stocks tend to see window dressing. Still, oil is extended and a decline here in oil may boost stocks, at least temporarily. The bond market thinks that there's some economic deceleration coming, so it's unclear how far the bounce in stock can make it. But we’ll have to take it a day at a time.
The S&P 500 took out short-term resistance at 1,214 and skyrocketed all the way to 1,220. So far so good. Let’s see if there's anyone to run with the ball tomorrow and the day after. In 2000, the market topped out after the summer rally on the last day before Labor Day weekend.
Another reason for the rally in Treasurys this morning was the weak Chicago PMI number that came in at 49.2. Some futures trader actually called the survey provider to verify the number as it was so week that it looked like a typo--the prior number was 63.5.
The Bonds Keep On Screaming
The 10-year Treasurys are barely holding 4 percent this morning. Those were yielding above 4.40 at the beginning of the month. That's caused the BB/Treasury spread that I wrote about yesterday to widen further to 256 basis points and the yield curve to turn its flattest since the Fed tightening cycle started.
None of the above facts are bullish developments. The yield curve is behaving like it has before the prior two recessions (marked with circles on the chart below). The yield curve hasn't inverted yet, which would mean a move below zero on the chart of the yield curve's slope (below), but it sure is close.
The real story isn't oil, which is marginally down this morning on news that the government is releasing the strategic petroleum reserve (SPR), but gas. Gasoline futures for September delivery, which have their last day of trading today, went up all the way to $2.80 per gallon this morning.
Keep in mind that this is a wholesale price and that at the retail level after all the taxes are added means prices as high as a $1 above the wholesale price. There's a gas station in my area that hiked prices overnight by 40 cents. That may be an extreme example, but news of gas lines in Alabama isn't stock market bullish.
The government has been extremely prudent with the SPR and didn't cave into demands to release oil to manipulate prices as they was climbing during the past year. The SPR is for emergencies and we have an emergency now. But you can't drive on crude oil and the gas shortage is the real story. I'm not sure what happens next, but the market is setting up for some type of a blow off top in oil, at least for a while, which is what suggested in my weekly commentary.
Tuesday, August 30. 2005
If The Bonds Don’t Like It, Why Should You?
I've been told by smart men that the bond market is smarter than the stock market. There was a sharp narrowing of credit spreads between Treasurys and higher-yielding lower-than-investment-grade BB-rated “junk” bonds before the March 2003 bottom in stocks. A narrowing of credit spreads is a bullish economic signal that suggests general economic improvement. I have to admit that I ignored that sign at the time and it turned out to be expensive.
Fast forward two years and now we have the opposite. There's a sharp widening of the BB/Treasury spread currently at 250 basis points (2.5 percent). That's coming off of a low at 126 basis points in March. There was a little narrowing after the initial surge in that index, but it's creeping higher during the past three weeks.
I'm not ignoring this again. In 2003, the spread came off extreme highs. Now it's coming off extreme lows. This is the mirror image setup of the 2003 stock market lows, but this time on the opposite side of the spectrum, at the top.
Oil Spooks Market, Again
Monday, August 29. 2005
Still Not Liking The Oil Setup
It is one thing to be bullish on oil, and it is quite another to buy the energy stocks at any price with the specter of a recession on the horizon (that’s right, consumer spending patterns suggest it's a clear possibility). The action in Wal-Mart (NYSE: WMT) says a lot.
The stock market gapped down as the oil futures flirted with $70 due to the fear that gasoline supplies will be affected disproportionately. Still, the oil futures are already nearly $2 below that level and stocks have turned positive. With the stock market mildly oversold, this gap down on the open is the perfect setup for a bounce.
The front month September gasoline futures contract was up 22 cents (more than 11 percent). But a look at later contracts suggests that the market forecasts it to be a shorter-term problem, as prices decline considerably into the fall. But then we get into the heating oil season, and there's no end in sight for the oil rally--or is there?
I don’t like the action in many oil stocks, some of which gapped up and sold off on heavy volume this morning. This is toppy action. Some of those oils stocks can decline 15 to 20 percent from here and will still be in bullish mode. There's a lot more downside than upside in oil stocks in the next two months.
Friday, August 26. 2005
W%R Still Decidedly Negative
I don’t discuss all of the market indicators I use, but most of them are in the bear camp right now. The rally we saw in July was program-trading driven, and the complete give back in August was the same.
More than 50 percent of NYSE volume is program trading on average, with that number becoming ridiculously high in the summertime when volume generally declines (read: easier to move the market). I don't like trading against machines that are trying to nickel and dime the market. This this will backfire, but until it doesn’t blowup spectacularly, nothing will change.
A good oscillator I regularly show, but rarely talk about is the W%R (see bottom pane). It is explained well here.
This has been one frustrating market to both the bulls and the bears. Last year was a tennis match between the two sides with a little bit of fireworks after the election. This year the situation is identical, with all major indexes in marginal negative territory for the year.
As Benjamin Graham, Warren Buffett's mentor said long ago: "In the short run, the stock market is a voting machine; in the long run, the stock market is a weighing machine." You can probably read that as technicals rule the market in the short run, fundamentals rule it during the long run. Where do you think the market is going then, based on the fundamentals? Have a good weekend.
Skype Is More Than Hype
I just tried the Skype VoIP system. I don’t consider myself an early adopter of technologies, but Skype had better quality than a regular phone call. It may be that I had a stereo headset on, but the headset was cheap. (The headset is a Labtec Axis-102, which goes for $15 at CompUSA. It's a little too small, so some of you may need to consider a different model; but at that price, they are giving them away).
The more important part it is that the Skype call was cross-Atlantic, although we both had a fast Internet connection (T1 on my side, DSL or cable on the other). I'll try with a slower connection to see how bad the quality deteriorates, but with fast Internet it's incredible. Since it's free (PC-to-PC calling), no wonder it's taking off . Intel (NYSE: INTC) and Google (NSDQ: GOOG) are rumored to be trying to buy privately held Skype, and Murdoch just tried but he didn't want to pay the $3 billion.
As far as the market is concerned, the S&P 500 has now declined 40 points from its highs a month ago, and the Dow has declined about 330 points. The 40 point S&P 500 selloff is the minimum amount you should have expected, given a similar setup this year. The maximum has been close to 100 (March top to April low).
I wonder what this selloff will turn out to be. But I don’t think we'll stop at the minimum, bounces along the way notwithstanding.
The market did an “opening range break” (took out the first hour lows right after 11 am EDT) and it's rather dismal out there. There's no sign of panic selling like what we saw near the January and April lows. That probably means it has to decline a lot further, but it should at least try to bounce off the 200-day moving average.
Thursday, August 25. 2005
The Palm Has Good Steaks, But Incredible Key Lime Pie
Smells Like A Dead Cat
The market has declined enough to solidify the view that the crack after the 1,245 high on the S&P 500 is legit. But it hasn't declined enough to suggest that the selloff has played itself out. We're due for a stab down to 1,190 and possibly down to 1,140 if that doesn't hold; that's as the worst month of the year--September--shows it horns (or maybe paws in this case).
My proprietary L/P oscillator is a little oversold, but it could become a whole lot more oversold if we are in the middle of this decline. Keep in mind that the L/P tends to be early--just as it was early in calling a top, it can be early in calling for a bottom. It isn't calling for any sort of low yet, but I'm just saying.
As far as the long-term picture of the market, it looks like the S&P 500 has broken an important long-term up trend line, and it is about to retest a very important short term up trend line that connects the 2004 lows at 1,060 and the 2005 lows near 1,140. This action is very toppy. But it is always good to remember that every time it has looked like a big decline is about to unfold, the market has turned around. Same of course if true for the rallies. One of these days this meandering will be over, and I suspect that we are much nearer to that day that the consensus estimates.
Wednesday, August 24. 2005
On The Low Tick
This market cracked like a ripe watermelon falling off a speeding truck on an interstate highway. That's a decent summary of today's action. It doesn't look like the piece will be put together in an edible format anytime soon. Read: Lay low and don't pick too many bottoms, as they're falling knives more than anything else. I've written about closing on the low tick before. Sometimes, it's the sign of a freight train leaving the station, so be careful.
The S&P 500 is in negative territory for the year. All this money being thrown at the market and it still can't go up. Doesn’t anyone ask why this is the case? I feel quite lonely when I ask that question.
The oil certainly spooked everyone. The big $3 crack last week didn't see increasing momentum to the downside and lead to a marginal new high today. Still, the oil is far from its trend. If this is the same old bull market we've seen for three years, it will either correct down to the mid-50s or have a super spike before correcting much lower. Either way, no matter how high oil runs, it looks like there will be a big crack to scare the bulls out. I'm bullish on the oil long-term, but it's getting an uncomfortably crowded trade.
Also, the S&P 500 Volatility Index (VIX), a tried-and-true indicator that I love all the more for the foaming-at-the-mouth commentary it produces here, did something meaningful today. It closed above 14, and most likely completed a major bottom. It will probably see its highs for the year near 18 in the months ahead. That means that the market will see the lows for the year.
I've repeatedly tried to explain that I'm not referring to the depressed levels of the VIX on a historic basis (not that that's very bullish), but rather its use as an oscillator in relation to its 20-day moving average. Just keep in mind that this hated VIX has been saying “sell stocks” for nearly a month, before the big crack.
Natural Gas Spikes
Despite the down open, the market again tagged the infamous 1,220 level on the S&P 500 for the seventh day in a row. What does it all mean?
I have no idea, except that I see it holding near an important level and coming back from all marginal breakdowns. That should be a positive but there have been a lot of bounces being sold, so it's still a mini-version of the stalemate that's been going on in the large cap stocks for much longer.
Despite that, a correction in oil is probably about to unfold. Keep in mind that any selloffs have only been pauses that refresh. This energy bull market has seen all the back-month contracts in oil futures (contracts that trade six to 12 or more month out) rise substantially. In previous spikes of the front-month futures, the back-month futures traded at discounts of $10 to $15 or more per barrel. That's no longer the case.
It's peculiar that the situation with natural gas is identical when it comes to the futures market. Natural gas' front-month futures (NG1 is the Bloomberg generic symbol) are trading near their 2000 and 2003 highs (although those highs happened in the middle of the heating season, and it's August now), while natural gas futures six months out (NG6), have surpassed their 2000 and 2003 high by a wide margin.
This energy bull market is a monstrosity that will be with us for years. But at this point, you need to focus on buying pullbacks as some of those stocks are extended and a simple correction can be worth a lot of points.
Tuesday, August 23. 2005
1,190 Is The Next Target, Close to 10K On The Dow
This market is slowly but surely trickling lower, and it's not unexpected. By this time in the rollover, the selling was lot more vigorous than in prior selloffs. That's meant to be a positive. Yikes.
I'm trying to be objective here, even though one is always biased by the prejudice of one's beliefs. The S&P 500 is on target to sell down to its 200-day moving average, which will be about 50 points from the highs at 1,245 (and about the midpoint of prior selloff ranges).
The 1,190 level saw resistance in the April bounce and support (on a closing basis only) in the June selloff. As a result, the 1,190 area becomes the second most important level after the yearly lows. The 1,200 mark is probably uniformly viewed as a more important support level but it won't hold, as evidenced by the action in major stocks such as JP Morgan (NYSE: JPM), Citigroup (NYSE: C), 3M (NYSE: MMM) and Wal-Mart (NYSE: WMT).
Few appreciate how badly the Dow has underperformed here. A comparison with the S&P 500 doesn't stand a chance, courtesy of smaller stocks in the S&P 500 that are missing from the Dow. Let's take it one support level at a time before jumping the gun (on both sides of the market) but if there's to be a fourth quarter rally, it should start between 1,140 and 1,190 on the S&P 500. The market doesn't have the luxury to fall much below 1,140, which makes that a make-or-break situation.
1,220 Is Like A Magnet
The S&P 500 continues its struggles with the important 1,220 level that was identified here on multiple occasions before the rollover started a couple of weeks ago. The market has been flipping around 1,220 for six straight days, four of them closing within a point of that important mark.
It still looks like investors are selling the rallies and that the market has a long way to go before it becomes as oversold as it was in late April, or even late January, when we saw important trading lows in 2005. The only time the indexes have been good buys since early 2004 was at a time when they were massively oversold. The post-election rally last year saw a less oversold bottom, but that was a special situation. There's no election right now, only $65 oil and a decelerating economy, albeit slowly so.
Here's the weekly commentary if you haven't signed up to receive it via e-mail (which you can do to the right of this page). I'll write more about this action after the close today.
Monday, August 22. 2005
No Bids
Friday, August 19. 2005
Murder By Numbers
These are the closing values of the S&P 500 during the past four days: 1,219.34, 1,220.24, 1,219.02, 1,219.71. Anything strike you as peculiar?
They are all less than a point from 1,220. It takes hard work to keep a major index on a particular level, but the options genie did it. Major institutions are heavily short options as they are the broker/dealers, market makers, etc. and they in many cases take the opposite side of the trade. They prefer to know which strike price major indexes and stocks with heavily traded options will be on expiration day. It doesn't work every time, but this time it worked well.
I see a lot of similarities to the March top and way this market is behaving right now. But there has been a lot of meandering on this correction and not a lot of downside action, yet. The S&P 500 (shown here on a closing basis only) seems to have broken down on a closing basis and the only likely targets are 1,200 and then around 1,180. But that doesn't mean that the market cannot try to rally first and then roll over and decline below the 50-day moving average, where it's been holding for four days.
Leadership groups like homebuilders, real estate investment trusts (REITs) and energy are coming down on heavy volume. As I pointed out yesterday, BB/Treasury spreads are spiking in a way similar to the last selloff in stocks that started in March. The stars are aligned in favor of a selloff. We’ll find out shortly if it's the pause that refreshes or the end of the last gasp rally for this cyclical bull market.
I have little doubt that this market is closer to a major top than to a major bottom. Until the 2004 lows are taken out, the bears will do themselves a great service to keep themselves contained before they can be sure that the wheels are coming off the wagon. The bulls should keep in mind that this market is likely to be much more the 1970s for the next five to 10 years--a lot of rallies and selloffs but no significant progress--and not squander the gains they've seen during the past couple of years.
Pick a camp, but know that stubborn fools on both sides will lose in the end.
About KCI Investing
KCI Investing has assembled a team of top investment analysts to create the finest financial news service possible. With well-developed research skills and years of expertise in their particular fields, our analysts provide quality information that few others can match.
KCI's main mission is to keep its subscribers ahead of the curve. Its editors' decades of financial experience serve as a fine filter, sifting value from fad and fact from hype. The combination of initiative and intellect at KCI provides readers with the highest quality information and ensures that quality will continue through the 21st century.
