Your Economy (No Politics)

[Bullwinkle]

~:~:~Market Trend Update for the Week Ahead~:~:~



Overview:
It’s that time once again to review the past week and look into the next. As mentioned in the previous update with which this post replies; The markets look ripe for a decline, whether it starts next week or not I am unable to say. We could see an undetermined amount of volatile range like activity, but many indicators lead me to believe that something is afoot. Range bound activity certainly sums up the COMP, but not so much for other indices. There is a bull/bear battle being waged throughout the markets, but we should soon see a resolution to one side or the other. At this point in time it is a coin toss, but some notable issues are as follows; NYSE is leading the DJIA and the TRAN is lagging behind both. The R2K is outpacing the COMP in which both are outperforming the NDX and the SPX is clearly leading the OEX. A slight shift in leadership has occurred and volume has picked up across the board, but whether or not this is Options Expiry related is yet to be seen. CoT open interest shot up prior to expiry and Fund flows saw a $1.3 Bln increase of which 30% went into ETF’s. Most notable was Money Market net cash outflows totaling $19.1 Bln. While Trim Tabs tends to be a bit of a cheerleader, they did report that corporate income tax payments rose 31.6% YoY 4-days before June 15th and that $2.3 Bln in fresh paper was sold on Thursday. Between mergers and buybacks, corporate America has been shrinking the trading float of shares by about $1 Bln daily. This is undoubtedly a major factor for the current strength being witnessed in the markets as of late. As for Oil, Gold and the U$D, there’s some hella interesting activity going on here. We saw new highs for Oil at well above $58bbl, Gold piercing $439 oz. and settling at $437 with the U$D retreating after having bumped its head on overhead resistance at 89. If that were not enough, XLE is at an all-time high, the CRB broke above 310 and Treasury Yields are climbing. Strange days indeed….

Economic #’s:
Econ data was mixed for the most part although some of these numbers are good or bad depending on ones own interpretation. This is especially true with PPI and CPI as well as inventories and production. My take from these numbers is that the Fed will not be easing it’s current policy of measured rate hikes anytime soon, but that is something with which many have discussed. We have a bunch of Econ data to review, so let’s get to it…

PPI/Core fell -0.6% after a previously reported increase of 0.6% and coming in below forecasts of –0.2%. Core prices, which exclude energy and food, rose 0.1% after a 0.3% increase in the previous report and below forecasts of 0.2%. The overall decreases were mainly attributable to declining costs for gasoline, computers and automobiles with the cost of energy accounting for ¾ of those declines. So far this year, producer prices rose 3.5% during the past 12 months, compared with a 4.8% rise in the year ended in April. Core prices were up 2.6% from May of last year, matching the YoY rises in April and March.
CPI/Core fell -0.1% after a previously reported increase of 0.5% increase and coming in below forecasts of 0.1%. Core prices, which exclude energy and food, rose 0.1% after a flat 0.0% in the previous report and below forecasts of 0.2%. Much like the PPI report, lower costs were fueled by cheaper energy costs (so to speak). So far this year, consumer prices are rising at a 3.7% annual rate compared with a 5.0% increase at the same time last year. Core prices are rising at a 2.4% annual pace, down slightly from a 2.5% rate in the first 5-months of 2004.
Retail Sales fell –0.5% after a previously reported increase of 1.5% and coming in below forecasts of –0.2%. The drop in retail sales last month was the biggest since June’04 with fewer purchases at automobile dealers and department stores leading the decline. May motor vehicle and part outlays fell by 1.6%, the biggest decline since a 2.6% slide in January. Non-store retailers, which include electronic and other forms of mail-order shopping, saw sales decline by 1.1%, the biggest drop since a 2.2% tumble in April 2003. Purchases of clothing and accessories fell by 0.8%. Sales at department stores and other general merchandisers fell 0.1%, while gasoline sales fell by 1.6%.
NY State Empire Index rose 11.6 after a previously reported decrease of -11.1, but coming in above forecasts of 1.0 while remaining below its average of 28.8 last year. Manufacturers' optimism about the next 6-months slipped as the measure of expectations fell to 34.3 from 36.3 the month before. The new orders index for June rose to 8.2 from -8.2 a month earlier. The index of expected orders 6-months from now declined to 42.9 from 45.8. The Fed's measure of shipments rose to 1 this month from -0.5 in May. The measure of inventories this month increased to 4.1 from -5.9.
Business Inventories rose 0.3% after a previously reported increase of 0.5%, but coming in below forecasts of 0.4%. The rise in inventories was slower than the 1.2% increase in sales and the inventory-to-sales ratio, a closely watched measure of how fast merchandise is moving from the warehouse out the door, dropped slightly to 1.30 in April from 1.31 in March. Both including and excluding autos, retail inventories rose 0.2%. Inventories at manufacturing firms grew 0.1% in April. Manufacturing sales dropped to a 0.7% increase after rising 1.6% in March and Inventories at wholesalers increased 0.8% while sales rose 1.5%.
Capacity Utilization ] rose 0.4% after a previously reported decrease of -0.3%, but coming in above forecasts of 0.2%. Work at factories, which accounts for almost 90% of industrial production, rose 0.6% in May after a decline of -0.1% a month earlier. Electric and gas utility production fell -0.7% in May after a -2.4% decrease the prior month. Mine production, the report's 3rd major component, held at a 0.1% increase.
Industrial Production rose to 79.4% after a previously reported increase of 79.1% and coming in slightly above forecasts of 79.3%. Production of consumer goods rose 0.5% after a decline of -0.9% in April, while manufacturing of business equipment rose 0.8% last month after a 1.0% gain in April. Production of business equipment is up 8.2% since May 2004. Furniture and appliance production rose 2.0% in May after declining -2.4% a month earlier. Economic growth slowed from a 3.8% annual rate in the last 3-months of 2004 to 3.5% in the first 3-months of this year.
MBA Mortgage Applications rose 17.4% to 887, adding to the previous week's 6.5% gain. The MBA's seasonally adjusted index of refinancing applications climbed 25.6% to 2967.4 after rising 10.3% the prior week. The MBA's purchase index rose 10.4% to 529.3, a record high, after climbing 3.6% the previous week. Refi’s increased as a percentage of all mortgage applications, at 46.4% of total applications, from 42.9% the previous week. Applications for ARMs fell to 30.9% of total applications from 31.7% the previous week. The average fixed 30-year mortgage rate averaged 5.62% last week, excluding fees, up 7 basis points from 5.55% the previous week. The average contract interest rate for 15-year fixed-rate mortgages rose last week, up 5 basis points to 5.18% from 5.13% a week earlier. Rates on 1-year adjustable-rate mortgages rose to 4.38% from 4.09% the prior week.
Building Permits fell 4.6% to 2.050 Mln after a previously reported increase of 2.148 Mln and coming in below forecasts of 2.106 Mln units. The number of homes authorized but not yet started fell 3.1% in May to 222K. The number of houses already under construction last month fell 0.2% to 1.329 Mln. Housing completions increased 6.9% to 2.071 Mln. Single-family completions rose 4.9% to a record 1.7 Mln, led by record completions in the South.
Housing Starts rose 0.2% to 2.009 Mln units after a previously reported increase of 2.005 Mln units, but coming in below forecasts of 2.050 Mln units. Starts of single-family homes rose 4.7% in May to a 1.704 Mln unit pace. Starts of townhouses, apartments and other multifamily dwellings fell 19.3% to a 305K annual rate. Starts increased in all regions but the South, where they fell 12% to a 903K unit annual rate. Starts rose 12% in the West to 540K, rose 19% in the Midwest to 381K and rose 5.1% in the Northeast to 185K.

As a side note: Residential construction grew at an 8.8% annual rate in the 1st Qtr, faster than the 3.5% for the economy in general. Production of construction supplies grew at a 4.5% annual rate in the 1st quarter, faster than the 3.5% rate for all industry…

Initial Jobless Claims rose by 1K to 333K from an upwardly revised 332K in the prior week with expectations having been for 330K. The 4-weeks moving average rose to 335K from 332.3K in the previous week. The number of people continuing to collect state jobless benefits rose to 2.641 Mln in the week that ended June 4 from 2.583 Mln the prior week. The 4-week moving average of continuing claims rose to 2.597 Mln from 2.585 Mln. The insured unemployment rate rose to 2.1% in the week ended June 4 from 2.0% the week before.
Philly Fed fell –2.2 after a previously reported 7.3 and coming in below forecasts of 10.0. A number greater than zero signals a higher percentage of the factories surveyed reported an improvement in business than deterioration. The index has been positive since June’03. Manufacturing is losing momentum after 2-years of expansion, as growth in new orders slow and factory employment falls.
Current Account (deficit) rose to –$195.1 Bln after a previously reported increase to $188.4 Bln and coming in above forecasts of $190 Bln. Needless to say this is an all-time record as the country sinks deeper into debt to Japan, China and other nations. The current account deficit for all of 2004 hit a record $668.1 Bln, up a sharp 28.6% from the previous record of $519.7 Bln in 2003. The rise in the current account deficit for the 1st Qtr meant that the deficit now represents 6.4% of the total U.S. economy, also a record as a percentage of the gross domestic economy.
Michigan Sentiment rose to 94.8 after a previously reported 86.9, but coming in above forecasts of 88.8. The current conditions index, which reflects Americans' perception of their financial situation and whether it's a good time to buy big-ticket items, rose to 110.4 from 104.9 in May. The expectations index, based on optimism about the next 1 to 5-years, increased to 84.8 from 75.3 last month.
Oil Inventories as reported by the DoE (Dept of Energy) and API (American Petroleum Institute). Crude according to DoE fell by 1.8 Mln bbls, but according to API rose by 4.5 Mln bbls. Gasoline according to DoE fell by 900K bbls, but according to API rose by 97K bbls. Distillates according to DoE rose by 2.5 Mln bbls, but according to API rose by 1.9 Mln bbls.

Next week’s Econ activity slows down considerably as we start off the week with LEI followed by Initial Claims, Existing & New Home sales and Durable Orders…


This week I am going to touch on a few things I want to get off my chest…

1) Stock buybacks and M&A activity is on the rise. A lot of these big corporations have a war chest of cash that they brought home from overseas and these dollars were taxed at a paltry 5.25%, a gift from our administration (how nice, I wish my income was subjected to a one time annual tax rate of 5.25%, don’t you?). What’s more is that these dollars, while being used to prop up markets, bottom-lines and shareholder value are not going towards creating jobs or bringing about any new technological advances. Could not these companies be a little more creative? These are just another in a long line of the many quick fixes we have witnessed over the last 4-years. Sooner or later these quick fixes or “band-aids” as I like to refer to them will not help anybody. Falling wages, declining job growth and lack of technical intuitiveness will rear its ugly head. While CEO’s and chairmen of the board as well as those on Capital Hill always get their extraordinary pay raises and bonuses in a timely manner, those in the trenches who put them in power are left behind. This is a trend that will continue until the good people of America get fed up with being treated like dirt while the few in power accumulate more wealth than they will ever need. It is not just that the wealth could be spread around a little better, but it is the suffering of so many areas that could put us on course of that which a 3rd world nation is defined. Do we really want to become a nation known for the greatest services on earth? I think not…

2) Oil, Oil, Oil… When prices spiked a little more than a year ago I was adamantly insisting that there was no shortage of oil, just the capacity to refine. I have insisted that we are being price gouged at the pump and that it was the big oil conglomerates who were responsible for lack of capacity. This is how they control the price of gas and the many products for which oil is used to create. Over the last 6-months it has been made clear by the heads of OPEC that this is exactly the case. Raising output does not help if it cannot be brought to market. If oil were reduced to $20bbl, do you think the price at the pump would fall likewise? Don’t count on it… While I tend to believe oil recovery has reached its peak, there is still plenty of oil to get us through this century. I made this observation and referred to African oil or the tar-sands of Canada and other areas that may not have the sweet easy money desired. Nonetheless it is out there and can be cultivated if truly desired. The problem is that it will dig into the big oil companies’ bottom-line and instead of them making 1000% profit they will have to settle for a mere 500%. Not only is oil plentiful, but we are becoming more efficient in our usage. On top of that while the USA may not be proponents of alternative energy (they say they are, but talk is cheap), thank goodness for the rest of the world who do not let their personal agendas get in the way. Much like the way that biotechnology is under-funded, so is alternative energy (at least in this country). We cannot have cures, only the prolonging of such while the few in power line their pockets. This is the mentality we are seeing within this nation. Money is more important than livelihood. And it is our foreign neighbors who will force change down our throats. Not because they do not have an agenda of their own, but it is driven by a different desire other than that of only money, it’s called the desire to create. Human nature is a funny thing -- amongst other things we can be driven by fear, greed and excellence. Unfortunately the USA has fallen under the two former categories, while striving for excellence has been left behind. Technology will never take a back seat to our darker side and you can bet your bottom dollar that sooner or later change will come about, whether it is spurred here in the USA or from elsewhere around the globe…

3) How is it that our Government can go out and do the types of things we do yet expect others to not follow suit? I am referring to any of the many policies pursued. We attack a sovereign nation, but we expect others not to do that. We loosen environmental policy and avoid the Kyoto Treaty, but we expect others to clamp down. We tell the world that nuclear proliferation is a bad thing, yet we avoid our treaty with Russia to secure materials and have an arsenal that can blow up the world hundreds of times over. We tell the world if they aid terrorists they are equally responsible for terrorism, yet we harbor a terrorist who blew up planes in Cuba. We tell China to stop pegging their currency to the U$D, yet we are the ones in debt to them. The list goes on and on, but I think you catch my drift. I guess what I want to know is where do we get off telling the nations and business communities of the world “do not do as I do, do as I say”? Not only is this a pompous and most arrogant attitude, it sets a very bad precedent. I would love to see the day where we once again lead by example, take responsibility for our own actions instead of resorting to finger pointing, disgard the double standards and restore the credibility the world once knew. Those days seem to be far behind us now, but maybe someday we can get our dignity back and be the country that everyone everywhere wants to mimic instead of shoot down…

What can we expect now?:
As mentioned earlier, it’s a coin toss as to which direction the indices will break. I will continue to stand by my original call that the break will be to the downside, but I am beginning to wonder. The longer we hang around, the more the chances increase for a break to the upside. The stimulus is fabricated, but what else is new? With that said and as mentioned previously, technical parameters are not aligning in support for a move up. We have a weak looking MACD, overbought RSI and diverging CMF and ROC. All of the indices are tipping the upper end of their Bbands in a pinching pattern. The R2K has taken on a leadership role and is now testing Dec’04 highs. The generals are not leading, namely the COMP and NDX, which closed with long black candles on Friday. I say generals because how goes these indices, so goes the markets (at least that is the way it has been since pre-election). The TRAN, which has been so strong even through rising oil prices is struggling and riding the 200DMA while the NYSE has taken up a leadership role over the DJIA. While most trends are up, this is not quite the Happy Family Theory of Markets scenario playing out as divergences are evident. Let’s just say something about this whole set-up seems suspicious to me. Overbought conditions exist on the DJIA and SPX, sentiment is well above 50% bullish and P/C ratios are still relatively low and tight with the volatility indices being extremely low. I see the possibility for double tops or H&S patterns developing from here, but these can be resolved to nothing if we break above resistance and test new highs. The A/D line has been suspect with decliners outnumbering advancers more time than not, albeit slight in nature. Up/Down volume has been mixed and new highs are readily outpacing new lows, although new lows are inching higher on the COMP. So the $64,000 question is can a further rally ensue? Most definitely, but a major increase in volume did not seem to help as much as I would expect. Again, maybe it was just Ops Exp related as the ramp in volume started around mid-week, but we shall soon see. Last but not least, let’s take a look at a couple of so-called canaries, namely SMH and GE. The SMH looks as indecisive as the rest of Tech land in which a break to either side can occur, but GE has been in a decline until Friday’s Ops Exp. FWIW, both look vulnerable to more weakness. On another note, we had a mild Bradley Turn for on/around the 17th, whether it shows an effect in the early part of next week is something to watch for as well as the upcoming Bradley on/around the 23rd. On top of that, we have a full moon on the 22nd for those who may follow moon phases. As for the U$D, Gold and Oil I had mentioned the following in the past update; I will take the contrarian view for speculation purposes only and say that over the next couple of weeks the U$D will crack, followed by Gold with Oil moving onto new highs. Well, we got the new highs in Oil, next we need to see if the U$D continues to weaken and if whether or not Gold finds a top. Conceivably, Gold will continue higher on U$D weakness, but it will need to take out $440 oz. Also having developed a personality of its own, it will be interesting to see how it reacts to any further U$D weakness should we get it… If $440 goes, then $445 will most likely be tested…

On a technical note, Bullish Advisors are at 52.7% with Bearish Advisors at 20.4% and looking a bit frothy in here. The VIX/VXN trends are still heading down and at the lower ends of their ranges. CBOE Equity P/C Ratio is at .533 with a 21DMA of .569 as the ranges continue to run tight. The RSI 5-Days are very Overbought on the SPX & DJIA and Neutral on the COMP with RSI 5-Wks being Overbought on the COMP & SPX and Neutral on the DJIA. The $NASI Daily (Summation), The $NAMO Daily (McClellan), The $NAHL Daily (Highs/Lows), The $NAAD Daily (Advance/Decline) and BP%'s are all still in overall downward trends (with the intermediate trends being up) where the 50DMA has crossed under the 200DMA with the exception of the $NAMO. The $NAAD is poised for a 50DMA cross back over the 200DMA. On another note, I am seeing possible double tops in the R2K & COMP with H&S possibilities in the INDU, SPX, NASI and all of the BP%’s…

Charts for the indices and indicators mentioned are posted below for your viewing pleasure…






























NOTE:
I continue to hold a USPIX position, which I will flip to UOPIX when appropriate.

CORE:
Funds; HSGFX, PCRDX, PRPFX, QRAAX, RSNRX ,TAVIX. Individual Stocks; ANO, BHP, SWWC

SWING: XLE

Disclaimer:
This disclosure is not a recommendation to buy or sell or to do as I do. It is only to give my thoughts on current market conditions and share the positions that I am holding for tracking purposes only. I am not a day trader and only attempt to identify up/down trends and play the swings.