today’s tape

So far, the markets have been able to remain strong despite the weakness in the financials and the banks. However, with these sectors making up a large portion of the S&P 500, one should monitor the growing divergence. I’m not sure how long this can last before one starts to follow the other ~ July 23, 2007.

The market is actually up 1% in February, but the financials are down over 5%. Don’t be surprised if the market begins to crash again ~ February 28, 2008.

Just as we saw over the summer the weakness in the financials continues to drag the entire market lower. (Today it was AIG reminding investors that the credit crisis is not over). As the S&P 500 and the other major indices have traded in tight ranges during the month of February I continually warned that further deterioration in the financials might spread throughout the market. And once we saw the commodity related stocks begin to drop, the market would would resume its down trend. And that’s exactly what happened today.

And even though the S&P 500 slightly bounced of the 1325 level at the end of the day, I think the market will soon crash through this level (absent of any crazy decision by Bernanke to cut the FED Funds rate before the scheduled March meeting).

The major banks are now joining the brokerage firms, trading back into the abyss. C, WFC, WB, WM, JPM – all were crushed for a second straight day; and most names are rapidly approaching their 52 week lows.

All commodity related stocks fell multiple percentage points today. And today’s drop may just be the beginning. Here is what I wrote on February 21:

As technology and the financials continue to drop, the groups you must pay attention to at this point are the commodity related sectors. Energy/oil, agriculture, metals and mining stocks have been on fire over the last two weeks…Look back to the end of 2007. The S&P 500 was already trending lower in November and December, but names like CVX, MOS and other commodity names were still humming along. It wasn’t until about mid-January that these stocks started to drop – and fast. If the market stops this crazy up and down nonsense and begins to trend lower again the gains that we have seen in the agriculture, energy, and metals sectors will be wiped away.

Agriculture, oil, natural gas, coal, steel, mining – each sector dropped today. With these groups still holding onto large gains from the past 2 weeks, there is still room for RIO, CF, FCX, COP and others to fall. Be careful.

The ultra defensive names have been unable to recover since their mid-January swoon. The drug companies (JNJ & MRK), food (MCD, KO, PEP), consumer staples (CLX, CL) – every chart looks like a great shorting opportunity. You know the market is week when the price action in these names is terrible.

It’s been a while since I have mentioned the solar names. Well, they’ve had a terrible two weeks because earnings misses and downgrades have killed STP, JASO, YGE and SOLF. The one name I still like in this group is FSLR. This is the one company that always spikes after they crush earnings. And if you look back to November you can see FSLR dropped right after it released earnings because the broad market began to fall. But FSLR recovered and began running up towards $275. And today FSLR was actually up as the market (and every other solar name) sold off. If FSLR can hold the $200, it may be ready for another run.

Trading volume was the heaviest it’s been in over 2 weeks, and we saw giant spikes in the volatility indices. These are just two more signals that the market may really begin to fall.

today’s tape

This morning’s GDP figure indicates the US economy is grinding to a halt, and the market responded accordingly. And as commodity prices continue to reach new highs (as crude oil, natural gas and precious metals did today) the economy will continue to struggle.

Thus, the retail sector suffered a large loss today. With the housing depression now spreading throughout the economy, investors may become worried that consumer disposable income may be hoarded instead of spent. You can see this in the earnings of most companies (like LTD, SHLD and KSS – just today) lower guidance for the next quarter. This is why I posted UA as a bearish idea in yesterday’s future stock to watch.

Now that the prospect of consolidation in the airlines sector has diminished, the entire sector has started to drop. Record high oil prices and a report that the CEO of US Airways expects to see a downturn in the airline industry didn’t help.

The financials also dropped with aggression today. Every day I urge you to stay away from the investment banks, but your focus should be on the major banks. WB, BAC, WFC, JPM and others suggest the major banks are about to break down and trade back to their 52 week lows. Take a look at WM.

This stock could easily lose $3 if the market continues to fall. Stay away from the financials.

If you are going to be bullish, it’s the commodity related names you must own. Look at the 1 month performance of the following OIL, Agriculture, Gold, Copper, Natural Gas, Coal and Steel stocks.

The ones to really watch (I think) are the natural gas names. The price of natural gas has just recently broken out above $9, and the UNG shows we are still about 12% off the 52 week high. Plus, the extraordinary volume in names like ECA, SWN and CHK when these stocks already trade at 52 week highs is quite bullish.

As you may have noticed, today’s rpice action was straight out of 2007. In fact, now that the market has forgotten about the 125 basis points the FED cut back in mid-January, the major indices have returned to their 2007 form. Here is the 1 month graph comparing the S&P 500, the XLF and XLE.

This chart should worry the bulls as it’s very to the one I posted on July 23, 2007 (showing the 1 month performance of the XLF versus the S&P 500). Here’s what I wrote at that evening.

So far, the markets have been able to remain strong despite the weakness in the financials and the banks. However, with these sectors making up a large portion of the S&P 500, one should monitor the growing divergence. I’m not sure how long this can last before one starts to follow the other.

Four trading days later, the S&P 500 had lost 5.5%. The market is actually up 1% in February, but the financials are down over 5%. Don’t be surprised if the market begins to crash again.

Finally, the technology names were given a relative boost after a Goldman analyst reiterated his buy rating on AAPL. It’s still premature to own AAPL (as it is for most tech stocks). If you want to be long somewhere in this space it has to be up trending RIMM.

future stock to watch

One of the sectors I am bullish on is retail. But given the range bound trading we can’t seem to break out of it’s prudent to find a stock that is falling to offset a (hypothetical) bullish position in KSS or JCP. So today, I bring your attention to UA.

UA was crushed in mid January, but the January FED rate cuts helped beaten down stocks recover swiftly. Now that the affect of the cuts have warn off, UA may be on track to continue its torrid down trend. UA was down 6% today on strong volume and could crash back below the $35 level if the market’s next move is down.

today’s tape

After claiming the high ground above the 1375 level on the S&P 500 the market opened lower apparently giving the impression the major indices were still unable to firmly break out of their trading ranges. But the market started to climb higher before the DOW stalled at the 12750 level I referenced yesterday. The market stayed near this level with little movement as Bernanke spoke before the House of Representatives.

Soon after the FED chairman’s testimony, the market, somewhat disappointed from what it heard, I suppose, began trading in negative territory. But we finished the day virtually unchanged, and the market is finally showing some true resilience. We still haven’t seen the aggressive buying yet, so I’m still cautious about the prospects of exiting the current bear market.

After today’s initial sell off, the market began trading higher once the government announced they would soften restrictions on government-sponsored investment portfolios. This help investors look past the giant loss FNM posted today. FRE and FNM had traded off about 7% before the opening bell. There was a sharp morning rally after the government’s announcement, but, ultimately, these stocks finished little changed. FRE reports tomorrow. You still can’t own these stocks. And as I have been posting recently, if you want to be exposed to the housing market you should own a homebuilder. TOL reported a loss today, yet the stock ended the day higher by 4.5%. Stop trying to figure out the actual housing market. You can play both sides by following the price: own RYL and short FRE.

The agriculture stocks were the worst performers of the day. TRA, POT, CF ad others were down multiple percentage points after posting large gains the past few weeks. This group could be in for some trouble in the very near term. The price action in the DBA (agriculture ETF) was startling today. The ETF traded twice its normal volume (and highest ever) after reaching a new 52 week high. But it eventually finished today’s session much lower.

The individual names in the agriculture sector can have steep falls over just a few days. Be careful today wasn’t the start of such a decline.

The brokerage houses and banks performed well today. The juxtaposition of the weakness in the agriculture and energy stocks with the strength in the financials is interesting. On the 22nd of this month I made a point of monitoring the divergent action of these groups.

These bullish [ag and energy] and bearish [financial] stocks continue to pull the market in both directions. Eventually, some of these groups will end their current runs; and this is when we will see the major indices break out.

I’m still waiting for the commodity related names to collapse or the financial stocks to reverse their downtrend before we officially break out of this trading range.

Many international markets are staring to push higher along with the US. I mentioned the EWZ (Brazil’s ETF) as the best foreign market to own. It recently passed through the $85 level resistance and 52 week high. The FXI (China’s ETF) finally poached its 30 day moving average after the $140 level proved to be strong support. An interesting pair trade is to own the EWZ and short NDX (still the worst US major index).

today’s tape

I was away for work the past few days and unable to update the site. I’ll be back tonight for review of Wednesday’s session, but I wanted to quickly address the action from Monday and Tuesday.

The swift market reversal from Friday afternoon has continued even as yesterday’s CPI number suggests stagflation is here. The S&P 500 broke out above the 1375 resistance I had been monitoring, though we didn’t see the explosion of volume. The next resistance level for the S&P 500 is near by, just below 1400. (And watch 12750 on the DOW).

Two groups I have become very bullish recently helped lead the market higher yesterday. My future stock to watch on February 21 was the homebuilder ETF, the XHB. After posting gains on Monday, the ETF was up over 6% yesterday. As I noted that day:

The weekly housing data is still awful, but this doesn’t matter when the stocks are moving higher. And the real housing crisis now rests on the mortgage lenders and the banks.

By comparison, look at how FRE and FNM have performed. Each stock was pummeled on strong volume against yesterday’s broad bullish action.

The retail stocks remain buys as the price action in names like KSS, JCP and JWN is much improved. Yes, LOW and HD provided weak earnings reports or guidance. And yes, M stated it will no longer provide same store monthly sales reports (never a good sign). Ignore all the ancillary that should have no bearing on your trading; all you need to do is pay attention to the stock price.

The price of crude oil has broken well beyond the $100. This has helped rescue energy/oil stocks from their January sell off. As with the price of gold and other commodity, don’t be surprised to see the price of oil continue its current run.

future stock to watch

Emerging markets firmly outpaced the the major US indices during the 2007 global bull run. Much of the attention was focused on China as the economy continued to grow at a double digit pace. And with the Beijing Olympics rapidly approaching, investors believed the Shanghai market would remain into the summer of 2008. But the slow down in the US economy had many foreign investors worrying whether the decoupling theory would ring true. The jury is still out on this verdit, but the FXI shows the Chinese stock market has faltered right along with the US market.

The FXI is well off of its 52 week high, but the 2007 July resistance has turned into major support for the index over the past few weeks. The FXI has traded below the $140 level on a few occasions, but the index has always managed to climb back above this support level before the closing bell.

But if you are looking to diversify internationally, the country you should be investing in is Brazil.

The rising commodity prices has helped the Brazilian market as many companies are heavily exposed to the metals and mining industries.  Currently, the EWZ is sitting right below $85 resistance level.  If the prices of copper, platinum and gold continue to increase, the EWZ may break out to a new 52 week high, sparking another prolonged bullish run for Brazilian equities.

today’s tape

The market was well on its way to post a second straight day of heavy losses, but a late day rumor of a potential buyout of AMBAC, one of the struggling mortgage insurers, helped spark the DOW gain 225 points from its session lows.

Without this rumor, certain areas of the sock market may have eroded below critical support levels. Yesterday, I mentioned the 1325 level of the S&P 500. The index was floating around this level right until the AMBAC rumor was announced.

You can also see the how the XLF and XLK – ETFs for the horrible financial and technology sectors, respectively – held the $26 and $22 support levels.

Deterioration below these levels would have pressured the market, possibly sending the major indices to new lows.

The news wasn’t all rosy for the mortgage companies Friday. FRE and FNM were under heavy selling pressure after Merrill Lynch downgraded each company to “sell.” Merrill Lynch said credit problems will persist for each firm. I specifically warned that these companies could face additional problems on February 9.

FNM and FRE have been trading in a tight range for months and were not able to rally like the homebuilders and major banks did a few weeks ago. Also, there was heavy short term put buying (February and March) in both stocks on Friday. Some investors are placing heavy bets that these stocks will collapse in the near term.

Like the XLF, without the AMBAC rumor, these companies were on the verge of nosediving to new 52 week lows.

Though the S&P 500 is trading right at its 30 day moving average (and right in between the 1325 to 1375 range I keep referencing), many major sectors are trading several standard deviations away from their averages. The rallies in the commodity related stocks have been tremendous: look at the XME, XLE and agriculture stocks. But the technology and investment firms are still trading well below their 30 day moving averages.

These bullish and bearish stocks continue to pull the market in both directions. Eventually, some of these groups will end their current runs; and this is when we will see the major indices break out. (Remember to confirm that any breakout happens on strong volume.)

If the price action in equities is driving you crazy, you might as well start owning commodities. Gold, silver, Platinum, oil, natural gas, wheat, corn…all prices are moving higher. The ETFs own trade are USO, GLD, SLV, UNG, KOL and DBA.

The retail names have put an end to their dreadful 2007 performance, and the RTH could be ready to trend much higher. The price action the retail names confirms my assessment from February 9.

Many retail names are still in much better shape than the S&P 500 right now. JCP, KSS, JWN and WMT are trading as if the economy will be able to recover without further turmoil.

JCP lowered their guidance during their earnings call this week, but the stock did not suffer. This is truly a bullish response considering JCP had already spiked 13% over the past month leading into the release, making the stock susceptible to a “sell the news” scenario. I think this group can continue to run higher if the market does not fall below its current trading range.

future stock to watch

One of the best trades of 2007 was to short the homebuilders.  I pounded this keyboard for months advocating that you could not pick a bottom in this sector.  We saw spikes in the XHB (such as the one in December), but the group never followed through will any additional, significant buying.

After Bernanke cut the FED Funds rate by 125 basis points in one week the XHB gained 33% during it’s initial rally.  The homebuilding stocks have come back since then, but most have held above the 30 day moving average, even out-pacing the S&P 500.  The group spiked yesterday and was ready to advance today if the market did not pull most stocks lower.

The weekly housing data is still awful, but this doesn’t matter when the stocks are moving higher.  And the real housing crisis now rests on the mortgage lenders and the banks.  You need to be selective in this group if you are going to pick an individual name.  There’s a reason SPF, BZH and HOV are trading in single digits while RYL and MDC aren’t.

today’s tape

The early morning futures (I’m talking before 6 am) suggested the market would open relatively flat after yesterday’s strong reversal to the upside. Then, slightly before 7:00 AM, RIMM reported guidance on their upcoming quarter that appeared to please investors. The NASDAQ futures immediately spiked, and RIMM began trading higher by almost 10% before the opening bell.

During most of 2007, there were 4 technology companies that could do no wrong in the eyes of investors. And they helped lead the NDX outpace the S&P 500 and the DOW by wide margins. The runs in RIMM, AAPL, GOOG and AMZN seemingly dragged names like INTC and MSFT higher with furious year end rallies. (Yes, AMZN is a retail company, but it trades like a technology stock.)

Towards the end of 2007, technology stocks began falling out of favor with investors. With a weakening economy now looming overhead, the risk appetite for the 2007 momentum stocks was shrinking. As a result, each of the aforementioned technology stocks were thrashed upon releasing their January earnings reports. (You can throw in VMW, JNPR, SNDK, NVDA and others for good measure.)

Well, not long after the market opened this morning, selling pressure started to drag equities lower. The large cap technology stocks cannot return to their 2007 form, and this is preventing a bullish market from reemerging. This is the third day in a row that the market gapped one way and then reversed course as the trading session went along. This is why you cannot trade any type of breakout until we see the market open way up (down) and then we see continued buying (selling) throughout the day on very heavy volume.

I keep talking about the tight trading range confining the major indices. Have a look at the one month chart of the S&P 500.

The S&P 500 has not broken out of the 50 point range between 1325 and 1375 in 12 trading days. You can see that these levels have acted as support and resistance for over two weeks now. When the S&P 500 ends a session either below the 1325 or above the 1375 level on heavy volume, I think we will start to see a prolonged move in one direction. You’ve been warned.

As technology and the financials continue to drop, the groups you must pay attention to at this point are the commodity related sectors. Energy/oil, agriculture, metals and mining stocks have been on fire over the last two weeks. Here’s a 2 week graph of one name from each sector.

Now…look back to the end of 2007. The S&P 500 was already trending lower in November and December, but names like CVX, MOS and other commodity names were still humming along. It wasn’t until about mid-January that these stocks started to drop – and fast. If the market stops this crazy up and down nonsense and begins to trend lower again, the gains that we have seen in the agriculture, energy, and metals sectors will be wiped away.

today’s tape

A brief update today as I spent the afternoon watching the Arsenal – AC Milan Champions League match.

After losing all of yesterday’s substantial gains the market finished higher after opening much lower even as inflation remains a persistent problem for the US economy.  The rising prices in both hard and soft commodities led to a larger than expected headline number.  Moreover, even excluding energy and food prices, core inflation continues to reach new heights.  Over the past 12 months core inflation has increased 2.5% – well outside the FED’s comfort range, usually assumed to be between 1 and 2%.  Plus, today’s reading does not include the very recent spike in oil prices to the $100 level.

What does this all mean?  Well, the market wants – and is expecting – more interest rate cuts.  But inflationary pressure may turn the FED less dovish towards interest rates (some FED presidents are already more hawkish than the market is willing to tolerate).  This will not help the financials. And, despite today’s gains, they still need help.  I have continued urging against owning the investment banking institutions as they trade near 52 week lows.  In today’s action the brokerage firms (and most banks, as well) held firm after opening lower.  But these groups have the furthest to fall if the current financial crisis worsens.  Why assume the extra risk?

HPQ reported a better than expected quarter, but the strength in HPQ did not spread throughout the tech sectors until late in the day.  The NDX did handily outperform the Russell 2000 for one of the few times this year.  Though, positive earnings surprises will not overcome the current bear market that cannot digest any unfavorable economic data.

In some of my more recent posts I have been writing about the trading range of the major indices and how the NASDAQ, DOW and S&P 500 are establishing lower highs and higher lows.  This convergence of the relative highs and the lows appears to be the product of two events.  The market is sold when any economic report suggests a recessing economy or a heated inflation number.  Yet, there appears to be an inherent floor under the major indices (for the moment) – when stocks reach the current support and near term bottom investors begin buying equities because they are now thought to be “a better value.”  But as of yet, there is little (to no) catalyst that can end the current bear market.  We are only seeing bounces after sell-offs.  Outside of a few sectors (gold, airlines and agriculture), we haven’t seen any signals of true market strength in months.

Continue to monitor the volume levels on the NYSE and NASDAQ to confirm any true breakout – up or down.  (And pay attention to the volatility indices I mentioned a few days ago.  They are spiking higher again.)  Someday soon the floor may break on the major indices, sending the market much lower.  Or – who knows? – we may see a sharp rally continue for weeks.  Either way, hold strength and short weakness.