OVERVIEW: Time to review the past week and look into the next. Hope everyone finds themselves in good spirits, even after that brutal Friday. What we saw was an implosion of sorts leading into Ops Expiry. Unexpected? Not really and as expressed last week: We see that the VXN is experiencing a mini spike of sorts and Max Pain numbers are relatively low compared to where we stand today. For instance, we will use the proxies for the COMP, SPX and DJIA -- QQQQ, SPY and DIA. The Q’s are @42.98, but MP is @40 and SPY is @128.68, but MP is @127 and DIA is @109.54, but MP is @104. There is quite a discrepancy in these numbers and if Max Pain has any meaning at all, then we have some correcting to do. As we now see, Q’s are @41.25, SPY@126 and DIA@126.47. Still, all of these numbers did not get to the Max Pain threshold, but for the most part I would have to say the objective was met. The week before last I had commented on the overly bullish sentiment after DJIA 11000 was hit and on some pre-existing conditions: I would like to caution those with rose-colored shades. We are as overbought as we were oversold prior to this current run. Stocks above their respective 200DMA’s have gone off the hook, the EPC dipped into the 4’s again and quite a trend is developing there. Total PC hit the 6’s and I see a number of OTM calls begging to get crushed. As it turns out, “crushed” was the proper terminology.
The CoT data shows that little has changed; a slight up-trend in open interest and a build in Commercial Short interest on the majors. Gold remains with Commercial Shorts lining up against Large Spec longs for a number of months now and Oil continues to see a decline in overall interest. You can go here to view the CoT data graphs #msg-9171642 -- Equity Fund flows as detailed by AMG Data Services reported Equity funds net cash inflows (excluding ETF activity) reported net cash inflows totaling $2.207B in the week ended January 18 with 70% ($1.545B) going to non-domestic funds. Including ETF activity International funds reported net cash inflows of $2.175B to all developed and emerging regions, as more international funds report inflows (847) than any other week on record (Jan 1992). Largest ETF Inflows were $343M to the iShares Russell 2000 Index fund and Largest ETF Outflows were -$830 Mil from the SPDR Trust Series I fund. Money Market funds reported net outflows of -$8.648B. The full report can be viewed at #msg-9350321 and a Money Fund Report can be found here #msg-9226503 -- As for Oil, Gold and the U$D, we saw Oil continue on its merry way and finishing out above $67bbl, Gold has been a little volatile, but staying above the $540 breakout and finishing out above $554 while the U$D remains lethargic and basing between 88-89. The CRB broke out to the 345 level and Treasury yields continue to bend with 2yrs @ 4.37%, 5yrs @ 4.31%, 10yrs @ 4.37%, 20yrs @ 4.59% and 30yrs @ 4.53% …
ECONOMIC #’s: Weak and getting weaker. You can gold plate a turd, but it is still a turd…
NY Empire State Index – Jan = 20.1 vs 26.3 expected 21.0 Capacity Utilization – Dec = 80.7% vs 80.5% expected 80.3% Industrial Production – Dec = 0.6% vs 0.8% expected 0.5% #msg-9296160
Core CPI – Dec = 0.2% vs 0.2% expected 0.2% CPI – Dec = -0.1% vs –0.6% expected 0.2% #msg-9314185
Net Foreign Purchases – Nov = 89.1B vs 104.2B expected N/A #msg-9314206
MBA Mortgage Applications – 1/13 = rose +2.2%, but fell –3.0% on a seasonally adjusted basis. Refi’s rose +9.9% #msg-9314193
Oil Inventories – 1/13 as reported by the DoE / API: (Crude bbls= +2.7M / +3.2M) (Gas bbls = +2.8M / +2.9M) (Distillates bbls = -900K / -937K) #msg-9331322
Building Permits – Dec = 2.068M vs 2.163M expected 2.100M Housing Starts – Dec = 1.933M vs 2.121M expected 2.035M #msg-9331346
Initial Claims – week of 1/14 = 271K vs 307K expected 315K #msg-9331269
Philly Fed – Jan = 3.3 vs 10.9 expected 13.0 #msg-9358102
Michigan Sentiment – Jan = 93.4 vs 91.5 expected 92.5 #msg-9358126
Fed Beige Book - Summary of Commentary on Current Economic Conditions #msg-9314199
The 1st of which being that of Iran and the so-called oil crisis. Don’t get me wrong, this issue could lead to tighter supplies, sanctions and quite possibly an altercation. The operative word here is “could”, not “is” or “will”… What we are seeing is a proactive reactionary movement (preconditioning) to something that has yet to transpire and may not ever occur. Doesn’t matter and never at a loss for a reason to price gouge, having issues with an oil producing rogue nation and enter the word Nuke as opposed to WMD and what we have here is a show now in syndication (a rerun if you will)… This is a perfect world for the Oil conglomerates and the big chiefs are doing the fandango. GWB will not let them down and they have their excuse (as always) to drive prices higher now and well into the future. This should get them through 2008, how perfect… If it isn’t one excuse it is another. Case in point, Natural Gas. With the effects of Katrina and Rita being the operative excuse, why is it the cost of NG has done nothing but go down since that time? Crude oil spiked intensely, but every year since 2003 we have had a spike in the cost of NG around this time of year. Yet we have had just the opposite in yearend ‘05 into ‘06 with NG returning relatively close to its norm. So why is it that home heating costs are skyrocketing? Because we have already been preconditioned to accept that energy prices will be higher due to the hurricanes. It does not matter that prices have fallen, the cast has been set in stone. If and when we ever get a president who will champion the cause for alternative energy, we will remain enslaved to the will of those that control the majority of resources.
How about that CNBS, what a gem… In their mission of fair disclosure they rarely disclose what is really important. These guys talk about the yield curve and then post graphical charts of the 5-yrs compared to the 10-yrs yields, in this instance 4.31% and 4.37% respectively… “What inverted yield curve, I see no inversion”, says Liz. “This graphic shows you plain as day that the 10-yrs is above the 5-yrs, just like it should be”, says Ted. Well if they had the presence of mind to fully report what it is they speak of then they would also include a chart of that 2-yrs yield as well. The 2-yrs? Is that important? Now if I wanted to be fair and what’s more “truthful” in what it is I am representing, I would think that it is very important to include the fact that the 2-yrs yield is HIGHER than the 5-yrs and the same (and at times higher) than that of the 10-yrs, no? There you go, right under your nose there Liz & Ted, now we see that an inversion does exist and what it looks like. What a bunch of boneheads…
Last but not least, earnings… Profits are higher, revenues are streaming, but estimates miss? What is wrong with this picture? I have brought this up before; How can profits rise, but estimates miss? It is because they always look at last year’s number (YoY) for comparison purposes and not quarterly comparisons… Whatever happened to QoQ reports, can’t remember the last time I saw one of those. It is more impressive and easier to hide any weakness by reporting a YoY comparison as opposed to that of quarterly comparisons. Is it any wonder that high profile companies are not making estimates? No, it is not. As a matter of fact other than 2003, earnings have been weakening. Through these tactics of M&A and stock buybacks, the realities have been hidden. Slowing growth is not only a reality, it has been with us for quite some time. Should you care? Dam straight! If you are an investor and the reality of conditions are being shielded by war chests of money going toward propping a stock and not toward the progression of technology, the overall health of that company is not what is being touted and sooner or later those chickens come home to roost…
Got SPIN?…
WHAT CAN WE EXPECT NOW?: We should not assume last weeks activity was all Max Pain related as we still have a cautionary atmosphere and as I pointed out in last weeks update: We also see that a Bradley Turn date scheduled for on/around Jan 15th came into play this weekend. Whether or not you believe in this cycle, it either took place the week before or will be determined in the week ahead. Of course it could also be a non-event although it appears as though Bradley has already spoken. Top it all off with world events; economic/geo-political and what we have here is a precipice for more weakness in the week ahead. Uncertainty is beginning to creep into the markets psyche be it the Fed change, Iran, earnings and slowing growth via housing and consumer spending. It may be a little premature to say this, but if earnings are anything less than stellar, a top may be in for the majors… I tend to believe we could be at just the beginning of what was started a couple of weeks back. Earnings have been lagging with 24% of companies reporting misses as opposed to 20% in the past. The latest hits and misses can be found here #msg-9226608
Earnings have not been meeting expectations and missing estimates no matter how much in profits are being made is not going to buoy stocks at this point in time. While we may see some brave souls buy the dips, I tend to believe any upside will be limited and short lived. Friday’s drop is quite reminiscent of years past where a decent decline had taken place shortly thereafter. What’s more (and I cannot stress enough) is when the EPC reaches the 4’s it has historically been followed with a correction. How long and how deep is yet to be determined as the cycles (timeframes) have shortened up considerably over the last year, but as you can see from the trend in an EPC chart I posted back on Jan 11th at #msg-9218250 we were overdue. All gains from the strong New Year beginning have been wiped clean in a little less than a couple of weeks. Indications are we have more work to the downside and technicals appear to be confirming this action. It may not be straight down from here, but the trend appears to have changed. A couple of things I found interesting; 1st being that even though the A/D and Up/Down Volume was very one sided, the New Highs to New Lows were quite favorable. NYSE H/L were 6:1 and COMP H/L were 5:1, kind of odd to see such strength in the face of weakness. Either there is some major rotation going on or it was just an anomaly. The 2nd point of interest is here #msg-9297286 where I revisited the 3 peaks and a domed house scenario earlier in the week…
As for the U$D, Gold and Oil, we most likely follow the path of least resistance. The U$D could see some strength off of the next Fed meeting as it has been basing in the 88-89 area, either that or the bottom falls out and it revisits 87 in the near future. Gold still looking strong, but I sense weakness whereas we may see some overbought conditions alleviated before an attempt at breaking $560 with authority. Gains may be a little more difficult to come by excluding geo-political/economic concerns and a top in the PM’s cannot be ruled out. Same goes for Oil, one look at an Oil chart and one can see a very checkered gap filled move (Swiss Cheese if you will). This leads me to believe that this current move is not that of a healthy type and some gap fill sessions may be in store. As you know this part of the market is difficult to decipher. Any one of a plethora of news events can change things overnight. All in all, we remain in the current trends speculatively speaking…
Technically Speaking, Bullish Advisors are at 57.3% with Bearish Advisors at 22.9%, an increase in Bullishness in spite of last weeks decline. The VIX spiked through the 14’s and VXN is close to 20 (an area we have not visited since Apr’05). The CBOE EPC Ratio ended the week at .692 with a 21DMA of .577 and TPC ratio at 1.084 with a 21DMA of .808. The RSI 5-Days are Oversold across the board. The P/C ratios, VIX/VXN, $NASI Daily (Summation), $NAMO Daily (McClellan), NAHL Daily (Highs/Lows), $NAAD Daily (Advance/Decline), 200DMA stocks and Bullish %'s all can be viewed below along with the major indices…
CORE: SRPIX, ENPIX, €uro & ¥en Currency (added NXG on the mid-week dip)
SPECULATIVE: DNDN
SCALP TRADE: CMVT dumped, never really panned out
SWING: USPIX, ABLE, GEOI
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 attempt to identify trends and create a track record through the positions that I hold. I am not a day trader and invest mostly in funds or baskets of stocks, perform occasional swing trades and have recently gotten into scalping. Data presented may not be 100% accurate as I do make mistakes, so please perform your own due diligence and verification.
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