PRVB on Radio Show Monday 9:07PM Eastern ....... Looks like Powder River will be on the Corporate-Strategies Radio Show Monday Evening...........It says below that PRVB will soon post their proved reserves.
21 August 2006
Morning Economic Comments
Market Laboratory
INDEX
VALUE
CHANGE
DOW
11,381.47
+293.44
NASDAQ
2,163.95
+106.24
S & P
1,302.30
+35.56
DJ Transportation
4,386.61
+244.99
Russell 2000
711.68
+32.64
Dollar
85.09
-0.40
Inflation KR-CRB
332.32
-12.21
GOLD
612.10
-21.40
SILVER
1201.00
+15.70
COPPER
345.00
-6.30
Crude
71.14
-3.14
Natural Gas
6.731
-.538
Unleaded Gas
196.69
-9.74
Heating Oil
198.95
-5.11
T Bonds
109.20
+1-11(4.97%)
10 YEAR Note
106-275
+255 (4.83%)
5 YEAR NOTE
104-22
+14 (4.78%)
VIX
11.64
-2.66
PUT/CALL:
OEX
RATIO: 124/100
+7/100’s
CBOE Equity
RATIO: 60/100
-16/100’s
Investor Sentiment: Bullish: 30.5%, +5.1%; Bearish 35.8%,-6.7%; Neutral 33.7%, + 11.8% ( 2 weeks aged )
Fundamental News
Stocks rally for a fifth day. Techs and transports led the rally while energy stocks faded. It was the best performance week since July 9th, 2003. For the week, ransports rose the most, up 5.9%; Nasdaq jumped 5.2%; the S&P 500 gained 2.8% and the Dow 2.4%. The April Nasdaq high was 2,370.88, which less than half its all-time high of 5,048.62, posted March 2000. The Philadelphia Semi-conductor Index ( SOX) rose 10%.
It was a pleasant relief rally amid so much doom and gloom from the ever worsening war on terror, the housing slowdown, the stock-option backdating scandal all of which has kept buyers at bay and investor sentiment at the lowest levels of the year for weeks on end. The tech-heavy Nasdaq had fallen 14% from early May through August 11th. There were just no sellers left and the shorts all scampered to get out the best they could in very thin slow, the dog-days of August trading conditions.
ECONOMIC DATA
Inflation data, so often blamed for aborting rallies and pulling the markets down, this time engendered the complete reversal suddenly and with the only warning being the very low sentiment week after week. The July Core PPI fell 0.3% which reduces the year-to-year cumulative Core inflation to just + 1.3%. The July PPI rose just 0.1%, which put the year-to-year inflation rate at 4.2%.
Core crude goods prices reached a new multi-decade high in July given the global pressure from both crude oil and metal prices. However, the CPI Core rose only 0.2%, while expectations were for a continuation of the 0.3% from the past several months. The year-to-year Core rate stands at 2.7% The July CPI rose 0.4%, which put the year-to-year rate of inflation at 4.1%..
Energy and metals prices are providing a powerful lift in a very strong economy and are slowly bubbling over to the core components causing higher retail prices in all intermediate and finished goods sectors but are being offset by efficiency and productivity savings. This revelation has sent Treasuries to their best levels (lowest rates ) since April 11th.
The Fed more closely watches core PCE prices as an inflation guide which stands at 2.4% year-to-year.. Overall CPI reached a 14 year high of 4.7% year-to-year in Sept given the push from energy prices and now stands at 4.1% yoy.
Technical
The market had a wild move this past week as we expected and it was all to the upside. The lower-than-expected PPI and CPI combined with the usually bullish option expiration week resulted in the indices we follow (DOW, S&P 500, and QQQQ (top 100 Nasdaq stocks)) all breaking out up through resistance levels. This resulted in a lot of short covering and a squeeze of the shorts into option expiration, which added to the gains. A lot of sectors of the market had become very oversold, such as the tech stocks and the DOW Transports so this rally was not really unexpected. The indices on Thursday and Friday stalled right near or slightly above the higher resistance levels (DOW: 11,344-11,400, S&P 500: 1300 and QQQQ: 39.00), given in last weeks letter. The question now is: is the market going to stop here and turn down or move higher? The next short/intermediate cycle is expected in early September and we originally believed it would be a low but it now appears that it will more likely be a high. At the moment the market is overbought and there has been a lot of call buying, so the market is likely to pull back this week, which is what usually happens the week after the market rallies into option expiration. After that pull back a rally into the usually bullish beginning of the new month period is then likely. A sell off into the next cycle (the 4-year cycle low?) in early/mid November is expected after that high (higher or lower high) in early September.
We still have some of the same negative aspects to this market: the Nasdaq is still badly lagging the DOW and the S&P 500 and the DOW Transports have sold off sharply the past several weeks and have just had an oversold rally this week. The best rallies are those when the Nasdaq leads, not lags. The Nasdaq did have a bigger gain than the DOW and S&P 500 this week but it was a lot more over sold than the other two indices.
Many expected the market to rally when the Fed stopped raising rates two weeks ago, however, history tells us that the odds are against it. During the last nine interest rate raising cycles since 1962, stocks have fallen an average of 7% between the time of the last Fed tightening and its first easing. The market rose only two out of nine times since 1962 after the Fed stopped tightening. Remember, the Fed stops tightening because the economy is slowing which usually leads to lower earnings. Also, the chance of a soft landing in the economy is only 20% (two of the past ten tightening cycles were soft landings (no recession)) which are not great odds.
The key levels to watch now are: S&P 500: support is at 1290, then 1280-1283, and then 1260, resistance is at 1310, and then 1320-1326, QQQQ: resistance is at 39.00-39.20 and then 40.00-40.20 while support is at 37.30-37.60 and then at 36.30 and for the DOW: support is at 11,250-11,270, then 11,040, and 10,825-10,900 while resistance is at 11, 400-11, 450 and then 11,650-11,675.
Cycles
We had a cycle due mid/late June and it was a low that came in on June 14th . The next short-term cycle was due in late July and it was expected to be a high, which came in on August 4th. The next short/intermediate cycle is due the first week of September and it is now expected to be a high, after the rally this week. The market is usually up the first few days of a new month so after a pull back this week the market is expected to rally into early September.
The next important cycle is the four year cycle low that is due later this year (an intermediate cycle is due early/mid November and that could be it). This cycle is one of the most reliable and regular cycles (every four years since 1962) that the market displays so it is wise to prepare for it. The nine month cycle low is also due around this time frame. Buying puts (as portfolio insurance) or selling some stocks on the current rally is now strongly recommended.
Option Recommendations
As per the recommendations in last weeks letter, put options (initial or additional positions) should have been bought when the indices reached the resistance levels given in last weeks letter: DOW: 11,344, S&P 500: 1300, and QQQQ: 39.00. We recommend to take some profits if the indices pull back to support levels (given above) this week. We now expect the market to go up into the next cycle due early September so additional puts can be purchased then for the expected move down into November.
As long as the four year cycle is down into the Fall (as are the nine month and eight year cycles) it is likely that surprises will be on the downside. That does not mean that there cannot be good rallies (as we had this week) , especially when the market gets oversold and/or there is too much pessimism. Similarly, it is recommended to take profits on some of the puts when support levels are reached during a sell off.
It is recommended that some puts are held to protect one’s portfolio (portfolio insurance) against a possible unexpected sharp market sell off and also as protection against the four year cycle low expected later this year (September-November time frame). The put options now recommended are: the DOW December 114 puts (djvxj) or the December 116 puts (djwxl) and the QQQQ December 40 puts (qqqxn) or 41 puts (qqqxo).
Stock Recommendations
Of our stock recommendations of the past five months (MDTL, ENZ, SEVT, HTE, DNA, UDW, CY, KLAC and CUSIF) five were up and four were down during the past week. There were very good up moves in MDTL, DNA and KLAC and some profits in these stocks could have been taken. This is still a good time to take initial or additional positions in ENZ, SEVT, and UDW. ENZ, MDTL and SEVT are all three special situation stocks: ENZ is a play on patent law suits that should hopefully be resolved soon, SEVT is a play on their oil contamination cleanup technology currently in progress in Nigeria, and MDTL has a short position of 6.4 million shares with a float of 7 million shares. All three could move up nicely if they have any good news. It is important to keep tight stop loss orders on one’s positions to protect profits and/or avoid large losses. Also, don’t hesitate to take some profits on any of the recommended stocks if they have a good move during the week (as was the case with MDTL, DNA, and KLAC). Protective stop loss orders that can be used are: ENZ: 10.00, MDTL: 19.00, DNA: 78.00, UDW: 0.50, SEVT: 0.40, KLAC: 41.00, CY:14.00, and CUSIF: 0.17. HTE is an oil and gas trust that yields 13% so is a good income purchase and a play on oil prices.
Powder River Basin as Corp will be our guest on the Corporate-Strategies Radio show tonight at 6:07 PM Pacific or 9:07 PM Eastern Time. They recently published record earnings and will soon post their proved reserves.
mike@princetonresearch.com
(702) 650-3000
(702) 697-8944 fax
3887 Pacific Street
Las Vegas, NV 89121
AI
