The Day that Was - December 20th 2007

Today the markets were flat to slightly up, mostly on advances in the Nasdaq. Oracle (ORCL) traded up 6.4% on very heavy volume and the price essentially flat lined after gaping up pre market this morning. When ever you see heavy volume and the price trades sideways essentially all day long, it shows a war between those who wanted to cash out and those who wanted to buy in was taking place. Resistance on Oracle is at $23.00 and today it did not quite reach that point. Going into today Oracle had almost 37 millions shares shorted and I expect that many of those original shorts were covered today. But as the price gets close to the $23.00 resistance level I will not be surprised at all to see a new building of shorts being held again.

Also on the Nasdaq was Research in Motion (RIMM), which traded up today ahead of their earnings tonight. After hours those earnings were good. The last trade tonight was $188.99 which is a gain of some 11%. Like Oracle today, tomorrow will tell us if the selling intensity is stronger than the buying intensity.

Outside of the Nasdaq the news was not so good once again, and again it was in the financial’s. Bond insurers are becoming a dangerous concern as today MBIA (MBI) announced that it was backing $8 Billion worth of risky mortgages, which is a substantial amount when you consider they are insuring a total of $30 Billion in total. Concerns of the health of the two largest bond insurers, Ambac (ABK) and MBIA (MBI) continues to be a large concern to the markets, and to us as well.

Bear Stearns (BSC) issued an outright dismal earnings report this morning. There will be more bad news coming from the financial sector, that you can take to the bank… that is if the bank is still there later.

So here we are at the end of the year. We only have a few trading days left in 2007 and unless a miracle happens the December rally that many were calling for will have never materialized and we will end the year below the highs. Usually at the end of the quarter and end of year we get the "window dressing" effect in the markets. Window dressing is the nickname given to mutual and hedge funds who buy into hot momentum stocks in order to show it in their portfolios for their clients. This term has been overly used over the recent years and it’s occurrence is actually less than is believed on the street in my observations. But even if window dressing were to be an impact at the end of this year the current market conditions will have derailed any window dressing plans. At this time mutual fund managers are trying to define how they are going to survive going into 2008, and trying to decide how to spread their assets. With the market appearing to be topping out it creates a tough decision for the managers, do they risk assets in high risk or do they stay conservative? Many managers may have already taken their positions already and the end of the year could be very uneventful and low volume. But for those managers who are still undecided we may see some increased volatility in the last few days as cashing out takes place. I will be particularly interested to watch to see how many block trades take place on RIMM and ORCL before the end of the year. If I see a large number of substantial block trades going through the tape then I will surmise that large institutions are taking their profits and selling out. Remember, when someone or some institution (hedge fund or mutual fund) who holds a substantial number of shares wants to exit the position they need high volume in order to have enough liquidity to exit the stock. Selling into strength is what they will do and as Lisa and I have been telling you over the last number of weeks we have been, and still do, see a lot of selling into the advances. There are people out there who are taking advantage of every price movement to reduce or liquidate their positions. So while prices may advance it is important to be mindful of the share size on the down ticks.

Lisa and I understand that there are those who believe the markets will continue to go up and remain very bullish, that is fine. Each person has their own risk tolerance and their own view of where the economy and markets may be going. But, you know that Lisa and I hold a different view of the current situation right now. We see too many trends and indicators that show divergences and a divergence speaks loudly to us.  Lets take for example the Philadelphia Fed Index data released today. While the "snapshot" was significant in itself it is the trend that is more important. The chart below shows the Philadelphia Fed Business outlook for the past 10 years. When you look at the data over time you can see the trend which has been declining since the bull market got going very strong  in 2004. So while the S&P 500 continued an upward move, the business outlook has been declining. This is a divergence and in a divergence something will give, our view is it will be the markets that give.

 

 

 

 

 

 

 

 

 

Recall that we recently discussed the amount of credit card debt people were taking on at an increased pace in 2007. As families continue to get squeezed more and more to pay the bills they must seek out money from where ever they can get it. And a substantial rise in credit card debt is one indication of people needing to carry more and more debt. Another sign of people having trouble making ends meet is the amount of mortgage payments now delinquent. See the chart below, the percentage is even higher than the last recession, and again the trend speaks loudly.

 

 

 

 

 

 

You see, technical analysis is much more than just picking a support and resistance level on a stock chart, It is about connecting the dots. It is about researching the broader indicators, economic data, foreign markets, commodities, and so on. For to be successful in the long run you want the best conditions present for your trades to work in your favor. It’s all about reducing risk. The famous trader, Jesse Livermore has said "It isn’t as important to buy as cheap as possible as it is to buy at the right time". As a trader these are words to live by.

I know an active trader that has spent the last 6 months actively swing trading during this market turmoil. That person has taken approximately 100 trades in the last 6 months and where is he now? Right back where he started, so after trading into and out of some 100 trades he gained nothing in the end for his losses and winnings were a draw. But guess what, that trader did lose a lot of money. Take those 100 trades, let’s say you pay $10.00 trade fee for each transaction. So those 100 trades took $2,000 from his capital and he made nothing for it. So what if your working with a small amount of capital as you get started in the markets, maybe you have $5,000 and you want to do swing trading and after 6 months of fighting this extreme market turbulence and big gaps (up and down) you wind up 6 months later at break even. But now add in the trading fees and that person who started with $5,000 now has only $3,000. So who is the winner? The winners are the ones that adhere to Jesse Livermore’s mantra of waiting for "the right time". When the time is right we will be trading actively, but not until we view the risk to be in OUR favor.

Lisa and I are here for the traders just starting out as well as those with more working capital. We will never assume our readers have money to burn and just want to trade for the sake of excitement. Money is paramount to us, and we will assume it is to you as well!

Market Close

A run-up in the afternoon let the markets close off the lows of the day.  Volume is light/average going into options expiration Friday and the long holiday weekend.  The Nasdaq had a good showing today, so everyone is all hyped up on tech again.  Ho ho hum.  More talk about all this glorious international growth going on to save the world.  Be careful about these glowing recommendations to buy everything foriegn.  Why?  I have three words for you “subprime is contained”.  See you at the wrap-up.

Mid-day Update

The Philadelphia Fed Business Activity Index:  -5.7 vs 6.0  That’s the lowest number since April 2003.  Employment number: 0.5 vs 4.8 prior (less hiring).  6 month business conditions outlook: 7.7 vs 11.6 prior (not rosy).

The Leading Economic Indicator:  -0.4% vs -0.3% expected.  Everyone expected a low number, they got an even lower one.  Puts us closer to that dreaded recession.

Banks/brokers still have more write-downs coming, as if it weren’t bad enough already.  It’s being reported that investors/analysts are pretty ticked after learning that (MBI) MBIA bond insurer didn’t tell the whole story on their CDO exposure.  Hold on tight to your 10 gallons (cowboy hats, for those of you not familiar), because I seriously doubt these guys will be the last ones to surprise with such news.

The markets are hanging on, but weak.  Financials, homebuilders, retail ETF’s are in the red.  Hearing that more banks are looking to China for capital infusion.  Maybe more details will come out later.

Pre Market - December 20th 2007

Bond insurers Ambac and MBIA are taking another blow to the gut as pre market trading has both trading significantly lower yet again on concerns of their ratings and exposures.

Bear Sterns (BSC) reported a loss per share of $6.90, last year the earnings were a profit of $4.00 per share. Traders were expecting a larger loss (this is still a substantial loss no matter how you measure it) so in pre market it trades up. But as always, we will be watching to see how much selling volume will be taking place on the advance. For it is in the ‘details’ that tell the true health.

Jobless claims has taken another notch upward this week so there is some growing concern on the employment picture and the economy. Remember when we presented the charts on employment it is the trend that matters the most, and the trend is showing a change in the employment picture towards higher unemployment.

With the good earnings from Oracle we want to see how the Nasdaq trades today. Oracle has resistance at $23.00 so there will be a significant battle between those who want to cash out and those who feel it will go higher, which will win out? We shall see.

The Day that Was - December 19th 2007

With each passing day we become more and more concerned about where our markets are heading. There is a lot of money that is being pulled out of the equities and being put elsewhere. A recent report of outflow data showed that for the 8th month in a row now the outflows from US equities has been greater than inflows is troublesome. As is the chart showing the divergence between the S&P 500 and the 10 Year T-Note yield. The lower the T-note yield gets, the more money is being put into the safety (a relative term) of bonds.

 

 

 

 

 

 

 

Chart: Comparison of S&P 500 vs 10 Year T-Note Yield

 

Today we learned just how much money banks have been holding out their hats for. The amount of money that banks are going out and trying to get to maintain liquidity is frightening. We can not stress enough how significant the events of the past 3 months have become. As I said, each day that goes by the more and more concerned we are becoming about the health of the economy and of the stock markets. This is not a ’shock and awe’ post tonight, it is simply to let you know that from our view we see much to be cautious about. Every advance in the markets just adds to the circus act of one more man jumping on top of the shoulders of the man below, A hard fall is in the making.

Let’s take a fresh look at where the S&P 500 is at. The chart below shows our current resistance levels…

 

 

 

 

 

 

 

 

 

 

And a chart of the Nasdaq 100, as represented by the QQQQ (aka Q’s):

 

 

 

 

 

 

 

 

 

An important note here regarding the Nasdaq. It is because of a few companies, i.e. Apple, Google, and Rimm that have been major supports of the Nasdaq. If these begin to roll over then the Nasdaq becomes much weaker and gets into dangerous territory.

The last chart I want to show you tonight actually came to me by way of John Murphy, in his commentary yesterday he brought to attention the world stock index which has shown it’s first sell signal since the bear market in 2000. This is a monthly chart, so the sell signal (MACD) is preliminary, but with the trading days remaining in this month becoming fewer and fewer it is looking like we may have our first sell signal on the world index.

 

 

 

 

 

 

 

 

 

The World Index is made up of benchmark stocks and funds from Australia, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, United Kingdom, and the United States. Being a global economy that we hear so much of these days it is important to grasp the importance of just how much the markets are intertwined more and more now. We now have Japan potentially rolling over into a bearish market, our market is dealing with a liquidity and credit situation of the likes not seen since the Savings & Loan crisis of the 80’s (and I should point out that this current liquidity crisis surpasses the crisis of the 80’s).

We are genuinely concerned about our markets, the amount Government rhetoric is ratcheting up at a pace which is becoming scary. The Secretary of the Treasury, Hank Paulson is in the news almost daily touting how great everything is. President Bush is heard talking about how strong the economy is almost on a daily basis. When the politicians talk this much about something that is ’supposedly healthy’ when the signs tell a different story then I get worried, and you should to.