OVERVIEW: This week was nothing short of volatile with big price swings and an increase in volume. As mentioned in the last update with which this post replies; As outlined earlier in the Overview and link to S/R charts, there are some very important lines to watch. The one that jumps out at me the most are the high traffic areas I outlined. These have proven to be trading ranges for months at a time and we bounced off of the bottom of these areas on the COMP and R2k, which are showing a little more resiliency than that of the SPX and DJIA. As the week progressed we see that this remains true to form where the COMP and R2k have pierced through their respective 200DMA’s and are about to test the upper end of the range that I outlined last week, while the SPX and DJIA continue to lag and remain close to where they had started the week. A rotation seems to be taking place whereas money has found its way into Small cap and Tech while leaving behind Large cap and Industrials. One thing I find rather odd is that there are no real clear-cut benefactors of this move. When looking at benchmarks some appear to be doing better than others, but nothing of any major significance seems to be taking place. Although this is left up to ones own interpretation, I tend to believe that specific stocks that are the big winners via earnings reports are what is driving the overall averages. This can be attributed to only a handful of stocks, but depending on their sector weighting they may have a significant effect on the overall index. This would give an appearance of strength whereas the overall movement is that of a beleaguered yet lingering move. Obviously I could be wrong, but to me this is what appears to be happening -- no real leadership, no real harmony -- just a lot of coattail riding and possibly stealth positioning for month end. The CoT’s data continues to show low open interest on the majors, but is now beginning to climb out of the depths with Oil beginning to head back up and Gold moving down off its peak. As for Long and Short positions, the majority of action appears to be surrounding that of Oil and Gold when compared to the majors and can be viewed at #msg-7253670 – As detailed by AMG Data Services, Equity funds reported net cash inflows totaling $1.376 Bln and inflows totaling $3 Mln excluding ETF activity in the week ended October 19. Domestic funds reported net cash inflows for the 1st time since August 17 totaling $161 Mln. Excluding ETF activity Domestic funds reported net cash outflows totaling -$1.034 Bln for the 5th consecutive week and the largest outflow from the sector since 1/26/05. International funds reported net inflows of $1.06 Bln ($877 Mln xETFs). Money Market funds reported net inflows of $9.022 Bln as Taxable MM funds report net inflows totaling $10.306 Bln and Tax-exempt MM funds report net outflows of -$1.284 Bln. This is the 2nd consecutive week of huge cash inflows with $18.528 reported inflows last week. Oil continued to weaken by trading below $60bbl for the 1st time since July 28th, but still managed to close out the week just above $60bbl. With continuing concerns over demand, profit taking amongst the oil and energy sector continued. Gold moved down and tested $460 before a sharp rebound to $466 and this on a strong day for the U$D, which continues to bob and weave around the 89-90 area. The CRB took a dive and dipped below its 50DMA finishing out the week at 322. The 10-yrs and 30-yrs T-Note yields ran into a soft patch and finished out the week at 4.390% and 4.609% respectively…
ECONOMIC #’s: More mixed messages, who or what can you believe?
NY Empire State Index was 12.1 vs 15.6 and the weakest level in 5-months with expectations having been for 20. The new orders component of the index jumped to +24.85 in October from a downwardly revised +11.64 in September, while the number of employees index eased to +9.26 from a downwardly revised +11.65 in September. The prices paid index climbed to +57.29 from an upwardly revised +53.93, while the prices received index jumped to +15.63 from a downwardly revised +10.11 in September. The future general business conditions index eased to +32.64 from a downwardly revised +38.14 in September. PPI/Core PPI was 1.9% vs 0.6% with expectations having been for 1.2%. The Core Rate was 0.3% vs 0.0% with expectations having been for 0.2%. Producer prices rose last month by the most in 15 years. Over the past year, producer prices have increased a hefty 6.9% on the back of rising energy costs, the biggest 12-month gain since the period ended November 1990. In contrast, so-called core prices have gained just 2.6%. Prices for cars rose 0.9% in September and prices for light trucks and SUVs gained 0.5%. Initial Claims were 355K vs 390K with expectations having been for 365K. The 4-week moving average of jobless claims fell to 376K from 396K the week before. The average was 317K the week before Katrina struck. The number of people continuing to collect state jobless benefits increased to 2.894 Mln the week ended Oct. 8 from 2.858 Mln the week before. The 4-week average rose to 2.852 Mln, the highest in a year, from 2.793 Mln. The insured employment rate, which tends to track the U.S. jobless rate, rose to 2.3% in the week ended Oct. 8 from 2.2%. Building Permits was 2.189 Mln vs 2.138 Mln with expectations having been for 2.075 Mln. Backlogs, or construction that was authorized but not yet begun, rose 0.8% to 235K units, the highest since May 1979. Housing Starts was 2.108 Mln vs 2.038 Mln with expectations having been for 1.975 Mln. New construction of single-family homes rose 2.6% last month to a 1.747 Mln-unit pace, the fastest since February. Starts of townhouses, apartments and other multifamily dwellings rose to a 361K annual rate from 335K in August. Starts rose in 2 of 4 regions. They increased 6.9% in the South to a 981K-unit annual rate and 1.9% in the Midwest to a 368K pace. Starts were unchanged in both the Northeast and West at 198K and 561K respectively. AS A SIDE NOTE:Concern about the outlook for housing at a time when Federal Reserve policy makers are forecast to keep raising interest rates has weighed on homebuilders' stocks. The Standard & Poor's Supercomposite Homebuilding index, made up of the stocks of 16 builders including Lennar Corp., has fallen about 26% since reaching a high this year in late July. MBA Mortgage Applications increased 6.1% to 737.5 from the previous week's 694.8. Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.09% last week, up 0.11% from the prior week and 0.01% higher than the previous 2005 high reached in the week ended March 25. The MBA's seasonally adjusted purchase mortgage index rose 7.3% to 503.9 from the previous week's 469.5. The index rose for the 1st time in 5-weeks. The group's seasonally adjusted index of refinancing applications climbed 4.5% to 2,095.7 compared with 2,004.9 the previous week. Oil Inventories as reported by the DoE (Dept of Energy) and API (American Petroleum Institute). Crude according to DoE rose by 5.6 Mln bbls, but according to API rose by 11.3 Mln bbls. Gasoline according to DoE rose by 2.9 Mln bbls and according to API rose by 2.8 Mln bbls. Distillates according to DoE fell by –1.9 Mln bbls, but according to API fell by –871K bbls. Leading Indicators (LEI) was –0.7% vs –0.1% with expectations having been for –0.5% with the indicator slipping for the 3rd straight month. Philly Fed was 17.2 vs 2.2 with expectations having been for for 10.0. Prices manufacturers paid for materials rose to the highest in 25 years. Prices they received for their products jumped by the most since 1981, showing that companies have been passing those costs on to customers. The index of prices received by factories increased to 32.6 this month from 8.6. The prices paid index for raw materials rose to 67.6 from 52.7 in September. The new orders index rose to 18.6 in October from minus 0.5 in September. Unfilled orders increased to 0.8 from –10.9. The shipments index rose to 19.5 from 13.2, and the measure of inventories fell to –4.5 in October from 1.4. These numbers are of quite a contrast when compared to that of the NY numbers.
Econ activity for the week ahead with the following market expectations: Consumer Confidence (88.3), Existing Home Sales (7.20 Mln), Durable Orders (–1.5%), Initial Claims (340K), New Home Sales (1.250 Mln), Chain Deflator (2.9%), GDP (3.6%), Employment Cost Index (0.8%) and Mich Sentiment (76.0) …
I would like to start today’s spin with a saying I once heard and fits my current mood… “It is tough to soar like an eagle when you are surrounded by turkeys” -- Coined by unknown
Under the category of earnings; If revenue equals the total income produced by a given source, how can income be down and revenues be up at the same time? I have seen this in more than a few reports as of late, obviously I am missing something or all this double talk has you, me and Wall Street more confused than anyone is willing to admit. And whatever happened to Quarterly comparisons? All I ever see are YOY comparisons. I know, it looks more impressive to state revenue rose 20% YOY instead of up 7% one Qtr, down 15% the next, up 22% the following and then down 14%… The bottom line is inventories and costs are rising and one-time write-downs of repatriated profits are not part of the Job Creation Act. Instead of going towards R&D or job creation as intended, these funds are being used to prop the market via stock buy backs and M&A activity. Just my take FWIW…
Under the category of inflation; Material costs, Import Prices and PPI saw the largest increases in15-years with CPI seeing its largest increase in over 25-years. And to think this is happening with the highly manipulated and reformulated calculations, can you imagine what the real numbers must look like? But who needs numbers? I don’t need no stinking numbers to tell me inflation is present. All I have to do is live my everyday life. Contrary to opinion and core numbers, it is not only food and energy that are going up. Have you been to Home Depot lately? How about the movies? Ever pay for parking? School or office supplies? How about all those little fees that crop on your monthly bills or hidden service charges every time you go somewhere? Heck, even used items have gone up in price. Unless you live off of eBay, flea markets and yard sales -- nearly everything has been and will continue to go up in price. That is until the buying stops, then we can talk about recession and/or deflation…
Under the category of absurd; the Federal Emergency Management Agency (FEMA) will reimburse government entities 75 cents on the dollar for costs associated with rebuilding and repairs, forcing cities to come up with a 25% contribution. In other words, Katrina Aid comes at a cost to those who can afford it the least by basically requiring the local municipalities with wiped out tax bases to pay back 25% of the loan. Did you get that last word there, loan. If this does not send up a red flag about the shape of our economy then nothing will. I see higher taxes in the future. You have been warned…
Under the category of taxes; a presidential advisory panel appointed in January by President Bush to propose changes in the U.S. tax system is expected to issue its final report to the Department of the Treasury next month. Proposals reportedly include reducing or eliminating deductions of state and local income taxes, mortgage interest, and health-care costs; eliminating the tax on dividends and the alternative minimum tax; making some cuts to corporate and personal income taxes and doing away with taxes on the foreign profits of U.S. companies. In other words, bend over middle class America. And if you are curious where your tax dollars go, then click the link at #msg-8194279 and plug in some numbers.
Which brings us to our last category, job approval ratings. Last week President Bush earned a 39% rating, the lowest level of his presidency as calculated in the USA TODAY/CNN/Gallup Poll. Depending on which of the many polls you choose to view, ratings are in the low 40’s to high 30’s. Either way, Americans may be finally awakening to what many of us have known for quite some time now. It only took them 5-years to figure it out, but I guess better late than never…
Got Reality?…
WHAT CAN WE EXPECT NOW?: As mentioned earlier in the Overview, I am not seeing any real leadership. Does that mean anything in the bigger scheme of things? Nah… It’s all about sentiment, but earnings have been mixed at best so I would expect to see a considerable amount of volatility continue. I will continue to watch the traffic areas outlined here #msg-8129512 and will also continue to watch these charts at #msg-8132052 (COMP vs NASI, NAMO and BP%) and #msg-8132087 (COMP vs EPC and VXN). A move above COMP 2100 seems unlikely to me, but if we do move through this area then 2130-2150 is certainly a possibility. The R2k trend follows a similar scenario where a move above 645 seems unlikely, but if we do move through this area then the 650-660 area comes into play. This coming week should be the real test of the high traffic areas upper resistance. With that said, I would like to note that the EPC is falling back into the 6’s (5’s tend to be the extreme as of late), a continued decline in money flow persists (CMF), the mid-point of the Bbands have been reached for the most part and are usually somewhat resistive in downtrends with a Dragonfly like Doji on the COMP to close out the weeks session. The SPX and DJIA have been playing devils advocate, divergences of sorts when compared to the COMP and R2k. These are nowhere near their 200DMA’s, although that can change quickly especially for SPX if the Oil and Energy correction are close to an end. Speaking of which, Oil does appear to be getting close to that end phase of its pull back. We most likely see Oil shed a couple more dollars per barrel, but I would keep my eye on the big boys of this sector which report this week; namely XOM, VLO and APA (I am sure there are others, but these have my attention). I suspect they will have blowout numbers and this may give a lift to the trading vehicles associated with Oil/Energy plays. Gold is still range bound between $460-480 and appears to be putting in a solid footing for the next move up. I have been saying that I expect another leg up for some weeks now, but I believe patience will prove to be of a virtuous nature. The U$D will most likely continue to meander around this area, but after testing 90 once again it is probably getting close to time for it to crap or get off the pot. One last note, the Fed speaks out of both sides of his mouth and if the markets continue to move on every nuance, then I expect a wild ride.
Technically speaking, Bullish Advisors are at 45.3% with Bearish Advisors at 29.5%. Even with the couple of big up days on the COMP, the trend towards bearish sentiment moves slightly higher. The VIX/VXN are now residing in what may become a new range of VIX 14-16 and VXN 16-18. The VIX shows a 50/200DMA crossover with VXN sitting right on the 50DMA just below 16 at 15.82. The CBOE Equity P/C Ratio ended the week at .664 with a 21DMA of .662. The RSI 5-Days are Neutral across the board. The $NASI Daily (Summation), $NAMO Daily (McClellan), NAHL Daily (Highs/Lows), $NAAD Daily (Advance/Decline), 200DMA and Bullish %'s are all in steep downtrends. Charts of the aforementioned can be viewed below along with the major indices…
NOTE: I continue to hold a USPIX position, which I will flip to UOPIX when appropriate.
*Sold BHP & SWWC for small gains ** XLE on the Friday morning swoon, may be a little early (we’ll see)…
*Individual Stocks; BHP, SWWC have been sold for small gains and used proceeds for **XLE re-entry
Speculative Stocks; ANO
SWING: PMPIX, SRPIX
Disclaimer: This disclosure is not a recommendation to buy, sell or do as I do. It is only to give my thoughts on current market conditions and share the positions that I am holding. I am not a day trader and invest mostly in funds or baskets of stocks and attempt to identify up/down trends and occasionally perform swing trades.
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