David's Trade Journal

[david_3011]

David’s Weekly Market Chartmentary May 15, 2005

Most analysts’ takes on the market for the coming week are either neutral or negative. However, I did notice signs of a rally for the week. Let's look at the Big Picture first...

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THE BIG PICTURE

QUESTION: O.K. David, we've had enough of your doom and gloom. You see March trade deficit came in much lower than estimated at $55 billion. This was the lowest since September 2004, and it's approx. $5.58 billion less than February's trade deficit. This is going to improve our next quarter's GDP. And, don't give us the nonsense about the consumption again because April retail sales shot up 1.4%, which was the biggest increase in seven months.

ANSWER: I'm afraid you'd only taken the government's press release for granted without taking your own time to read the report. In any case, I'm neither a bull nor a bear. I'm merely reporting what the language of the market's telling us. I have no control over the direction of the market or our economy.

While the lower trade deficit might sound like good news, the inside numbers revealed a different story. If this reduction of trade deficit was due to our strong net exports, then yes it would be good news. The problem is our total export of "Goods" only went up $0.991 billion. The majority of the lower trade deficit came from the decline in imports of the Consumer Goods. Based on the data in the same report, March imports of the Consumer Goods decreased by $2.4 billion - see chart below.

And, since consumption is about 70% of our GDP, this takes us right back to my assertion of an imminent recession, or at best, an economic slowdown. And, it shows on the retail sector's recent performance.



The 1.4% increase in April retail sales as reported by the Commerce Department might've fooled the general public, along with some experts, but it did NOT fool Mr. Market at all. This Before and After picture of Amex Retail Holders Chart says it all.



We know and the Market knows that this was just one of those "Seasonal" adjustment tricks in the government statistics. Again, for those of us that read the report instead of the media press release, we know that the "NOT Seasonally" adjusted retail sales number actually DECLINED 1.3% instead. For more details about Seasonal Adjustments and other Hedonic Adjustments, please read the reports and do the research for yourself.

The bottom line, again, is just to keep your eye on the CONSUMPTION. Don't get distracted by all the other noise. Once you recognize this fact, then you'd be able to prepare your investment, your future, and your family's future accordingly.

Please keep in mind that debt build-up is Inflationary, but debt pay-off is Deflationary. And, when the government decides to Inflate its way out of $trillions of obligations, we'd then be in a "hyper-inflationary environment. So, these are the 3 stages of the inevitable economic outcomes. We've already gone through the phase 1. Now we're onto phase 2. Just keep that in mind with your planning and investing.

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PORTFOLIO UPDATE

Last week's minor setback of our Bankruptcy Law portfolio was due to the delay of a very important vote in Texas pertaining to the recent government imposed restriction on these "pay-day lenders" range of business practices.

I don't believe this sector's long term growth would be affected by these temporary setbacks. There's simply no way for these companies NOT to be in the business to serve the needs of a recessionary economy.

Meanwhile, the sleeping pills sector continue to stay ahead of the market.

I don't have the time to get the portfolio detail posted this week, but you're welcome to check in on them on www.clearstation.com.

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THE MARKET

I'd like to say, as everyone else's saying, that we're going to have another down week, but there are some minor signs that are not consistent with this general consensus. And, I don't know how to interpret it other than to say that this week may not be as much a down week as everyone else thought it would be. I could be just making a fool of myself, but then who hadn't?

Remember we looked at the 200-Day Exponential Moving Average last week? I mentioned that we're more interested in it's trending than it's locations - locations that serve as supports and resistances.

Let's zoom in on the latest development. Again, we'll use the Wilshire 5000, which is the broadest market index that consists of over 6,000 publicly traded firms headquartered in the U.S. We ran last week's chart on Friday, 5/6/2005, and the black vertical line marked that timeline. Let's see what occurred after that.



The interesting development this past week was that this 200-day EMA had moved above the previous high. And, if you'd compare with last week's chart, you'd see this previous high was approximately where we marked the pivot point when this EMA turned flatlined (fine, no one cared about my DNR humor from last week).

The significance of this twist is that, in the past, whenever this 200-day EMA turned up above the previous high point, the trailing market tends to follow its move, provided, of course, that we don't have a couple of huge down days to drag this EMA back down again. Nonetheless, I think this is an important enough detail not to be dismissed lightly.

There's one more thing, and it's about NASDAQ.

Whenever NASDAQ led the market, that's when the market's really on the move. This chart shows NAZ Index fell below S&P in early February. That's when this seed of the current fruit of the down market was planted. And the subsequent short-lived rally was nothing but head fake.

The interesting thing happened last week was that NAZ had started forming an uptrend, due primarily to CSCO and DELL's earnings reports. This uptrend then slightly crossed above the S&P. Although its sustainability may be in question, it's the first time in over 2 months the MACD stayed above the positive territory.



These 2 intraday 10-minute charts show that the Tech sector looks ready to charge ahead this week.





This week being the option expiration week, it's going to be quite volatile. In addition, April PPI and CPI are going to be out on Tuesday and Wednesday respectively. This is on top of many traders getting ready for some time off.

If PPI and CPI show no convincing evidence of strong growth, the market is going to start discounting the Fed's rate raising cycle. And, I doubt that both PPI and CPI would show much strength of inflation or economic growth.

This and all of the above could serve as catalysts for a temporary rally. I would not feel too comfortable staying on the short side this week.