today’s tape

Since equities began rising off of the July 15th lows I have remained somewhat skeptical as to the length and voracity of the current rally.  My concerns have been stated many times, most notably on August 5:

And that is the real issue at hand for this market: lack of leadership. Over the past 14 months, this market has been alternatively led by the commodity stocks (about 80% of the time) or the financials (about 20%). With the commodity names in free fall and the financial stocks just hanging around – while the companies are still losing billions of dollars – the major indices have no choice but to remain in their ever tightening trading range since forming a bottom on July 15.

This analysis remains true three weeks later.  Though we have seen both the financials and commodity names rebound (the XLF jumped 5% this week; the XLE 10% over the past 10 trading sessions), neither group is exhibiting long term strength.  I can’t find one bank stock that is trading higher after the late July surge in the financials; and the XLF still has not been able to breach the $22.50 resistance level (also the March low).  You still don’t want to own any stocks in this group.

Crude oil prices appear to have found a floor thanks to hurricane Gustav.  But if you look at the daily action from this past week, the USO was sold after gaping much higher on Thursday and Friday.  Most energy stocks have traded in a similar pattern.  It’s tempting to think that without the hysteria building over the incoming storm to the Gulf Coast energy prices might be trading much lower.  I wouldn’t be surprised to see crude and natural gas prices jump higher when the market opens next week, and ultimately sell off once again.

Because of the performance in the financials and commodities, I have often looked for technology to lead us higher.  But while some NASDAQ stocks were climbing out of their toughs I was not seeing the leadership from the large cap tech names.

August 23:

Many formerly weak technology stocks have recently established new bottoms and are starting to rise: NVDA, BCSI, SIGM, JNPR.  But we need to see new 52 week highs established by AAPL, INTC and RIMM.  Specifically, RIMM had its price target raised by Citi this week, but, surprisingly, the stock did not advance during yesterday’s 1.5% advance on the NASDAQ.  In fact, it has fallen from $135 twice since starting its recent run.  RIMM is a stock that should be running free during a bull market.

August 28:

I also find it somewhat troubling that RIMM and AAPL both traded lower on the day while the NASDAQ was up 1.2%. This shouldn’t happen. RIMM, APPL and GOOG (which is still trending lower) should be surging higher with the NASDAQ posting strong gains.

With DELL’s disappointing quarter has the NDX is in bad shape.  Neither INTC, CSCO, MSFT, RIMM, AAPL nor QOCM has been able to establish a relative high in the past month.  These names are losing momentum and are fading fast.

Friday was also a difficult session for the conservative, safe stocks that have performed so well.  PG, JNJ, MCD, WMT, and KMB were all dropped by significant margins.

And there you have it: this market is struggling to find leadership.  And that’s why believe this market will be testing the July 15 lows in the next few months.

today’s tape

Stocks are rallying – albeit on very light volume ahead of the final summer weekend – because economic reports have been better than expected, and because the financials are climbing higher again. The XLF was able to hold the $20 support this week and is now turning up. The market finished higher today because LEH was up 7%; MER was up 9% and AIG was up 7%. The falling price of oil will help the airlines and retail, but the affect of energy prices is ancillary to the rest of the market.

After three consecutive days of gains, the market has been able to recover the steep losses from Monday. But we are still trading in a narrow trading range that has led investors to sell strength. I also find it somewhat troubling that RIMM and AAPL both traded lower on the day while the NASDAQ was up 1.2%. This shouldn’t happen. RIMM, APPL and GOOG (which is still trending lower) should be surging higher with the NASDAQ posting strong gains. Perhaps DELL’s earnings report will help the larger cap technology names.

With hurricane Gustav headed to the gulf coast, fears of another Katrina are sprouting. But oil and natural gas prices plummeted today; commodities cannot regain their footing. The UNG traded about 275% times its normal trading volume and fell 6%. The natural gas stocks have run up so much recently – probably anticipating surging prices caused by the hurricane – and they may begin to sell off if the storm causes little to no damage materializes.

If that is the case, airline stocks will continue their impressive rebound. The XAL index has retreated some after oil prices stabilized last week. But if the USO breaks below the $90 level, theses stocks may gain another 50 to 100%. Retail also continues to trade inversely to oil.

Expect tomorrow to be a volatile session as traders continue to eye the progress of hurricane Gustav. Perhaps when the calendar turns to September the market will break out.

today’s tape

I’m currently on travel for work. I will return with updates on Thursday.

today’s tape

Further erosion in the financial sector continues to weigh on the broader market.  Over the weekend I claimed this market will only resume its upward momentum if the banks can halt their recent declines; and it’s not happening.  LEH, AIG, and MER are now racing to new 52 week lows, and others will likely follow.  My recent bullishness sentiment is fading fast, and it now appears the major indices will retest the July 15 lows.

And if we do indeed test the lows of July 15, I do not believe this market will hold.  My reasoning?  When the July 15 bottom occurred there was still some doubt about the coming collapse in commodity prices.  Oil was still trading above $140 a barrel and most other commodities were similarly priced much higher than their current levels (see natural gas, gold, silver, copper…).  These elevated prices were still providing some type of support to the oil, energy, coal, and steel stocks.  This is no longer the case.  Subsequent rallies in the XLE and XME are now being sold – and sold with conviction.

There is still no leadership for this market to grab onto.  And that is why I believe this market will begin to trade lower.

today’s tape

Friday’s news of LEH losing its independence to a Korean bank provided much need support to falling financials and the market in general.  The common consensus that FRE and FNM are essentially worthless was worrying investors and preventing the major indices from establishing a new relative high this week.  After closing above the 1,300 level on August 11 the S&P 500 has struggled, though the index has been able to hold its 30 day moving average.

Even so, I have become less enthused about this market heading higher as the financials continue to weigh.  However, if we can close above the 1305 level next week new money should enter this market.  Make no mistake, this will only happen if the financials are bid higher.

I have reposted my comments from July 23 many times, recalling the pattern of growing divergence between the financials and the broader market.  And taking a look at the monthly performances of the XLF and S&P 500, that commentary is noteworthy once again.

August 23: So far, the markets have been able to remain strong despite the weakness in the financial sector. 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.

The July 2007 and June 2008 market collapses both began with the financials rolling over.  We are not far from a third occurrence.

I also believe you can trace the strong performance in commodity stocks to this week’s weakness in financials.  Commodities continue to trade inversely to financials; coal, oil, and agriculture stocks had their best weekly performance.

Stepping away from the volatile financials and commodities, healthcare stocks look ready to resume their up trends.  WLP, UNH, CVH are trying to reclaim their early 2008 losses.  The safety are still working: PG, WMT, MCD, JNJ and KMB are gaining like I’ve never seen.  These stocks should not be leading a bull market; and it makes me weary of how much farther the major indices can climb.

Many formerly weak technology stocks have recently established new bottoms and are starting to rise: NVDA, BCSI, SIGM, JNPR.  But we need to see new 52 week highs established by AAPL, INTC and RIMM.  Specifically, RIMM had its price target raised by Citi this week, but, surprisingly, the stock did not advance during yesterday’s 1.5% advance on the NASDAQ.  In fact, it has fallen from $135 twice since starting its recent run.  RIMM is a stock that should be running free during a bull market.  Overall, for technology, it would be very encouraging for the bulls if the NASDAQ were to close above the 2450 level at the end next week’s trading.

But of course, it all comes back to the financials; and they remain very dangerous.  Have a look at the one day chart of LEH.

If LEH, MER, AIG (which may be downgraded by Fitch) break to new lows, this market will break down again.

today’s tape

I’ll return this weekend with a full round up of this week’s action, but it’s important to realize what happened today.  Despite a $6 move in crude oil, the market still managed to finish with slight gains.  But how can this be…everyone is saying higher oil prices will hurt the market? Well, everyone is wrong.

The market starting climbing higher mid session today because LEH started to rebound.  We also saw some stabilization of FRE and FNM after their initial sell off.  The XLF is now trying to hold the $20 support from late July.  If we can avoid a break down below this level – which will only happen if MER, LEH and others can avoid falling to new 52 week lows – we might see this market recover for another run to the 1300 mark on the S&P 500.

But please, forget about the price of oil.  This market is trading on the strength/weakness of the financials.

today’s tape

I found some time to remind everyone what this market is currently trading on: the health of the financials.  Everyone keeps chirping about oil, but the price of crude has minimal influence  compared to FRE, C, AIG, LEH, and every other distressed financial company.  Write it down, and keep it next to your computer.

today’s tape

I am currently out of town for work.  Regular updates will resume on August 23.

today’s tape

A brief update today.

The market was able to shrug off 17 year high inflation data and another increase in jobless claims to edge higher Thursday.  It’s tough to ignore the early reversal in equities after gapping lower, and the overall resilience of this market.  The major indices, despite a weak consumer (remember yesterday’s numbers from LIZ and other retailers?), heated inflation, slowing economic growth (which may become negative), and rising unemployment, are finding ways to trade higher.

But as certain economies in Europe and Asia are already contracting, perhaps the relative strength in the US is boosting domestic investor sentiment.  Also at play is likely the new found strength in the dollar versus the Euro and British Pound.  Whatever the true reason (like it matters, anyway), stocks are gaining value.

The XLF climbed back above the $21 level today – key support at the moment.  For the S&P 500 to reach another new relative high, the financials will have to lead because commodities simply cannot regain their footing.  Watch for the S&P 500 to break above the high from August 11.

today’s tape

Though the media has largely attributed to the recent rise in equities to the sharp contraction in energy prices, your humble market guide (that’s me) has always maintained this analysis to be shortsighted. The market’s advance can be 100% attributed to the financials; the major indices will only reach higher ground if the financials can break the habit of surrendering their substantial gains one month later. To repeat (because it bears repeating), over the last 14 months, the financials have been the only factor influencing this market. Yesterday it was JPM and GS killing ruining the market’s current run; today ZION and the rest of the regional banks dropped the major indices over 1%. The XLF is now trading as if it will test the July lows in the coming weeks (certain individual names are already there).

And with the financials falling, commodities and commodity stocks began to rise. Remember, this has been the same trade since 2007. If the financials gain, commodities fall and vice versa. So we finally saw POT, CHK, NUE and ACI finish with strong gains. If the financials continue to slip, commodity stocks should be able to recover for another few days. But you can’t get too excited about the long term prospects of commodities. The trend reversals of the dollar, oil and gold are just too compelling.

Here’s what to watch for over the next couple of weeks: with the financials and commodity stocks starting to converge (one group falling down to 30 day moving averages, the other group climbing back to theirs), will we continue to see these groups trade inversely of one another? Or can they actually begin to trade higher together and lead this market upward?

The next two days will be very important for this market. If the financials cannot rally after facing more adversity (they haven’t been able to for months), I do believe this market will falter.