Today’s market activity was essentially a "play day" of retail money. What I mean by this is that we did not see much evidence of any significant block trades or other high dollar value trades going through the tape. The commodity stocks brought retail money out of the woodwork as a way to get in on something that is going up. We can’t argue the fact that commodity prices are going up, it is what is partly responsible for our run away inflation now. But even with commodity prices rising there is still caution that is required. For a lot of the commodity stocks we have been watching we are seeing mostly retail money (by analyzing share lot sizes on the tape). Now of course there is some larger money in there as well taking positions but experience has shown us over the years that the larger trades are hedge funds and other large money players who are playing on the exuberance of the sector to only cash out once the ride is over then leaving the retail trader left with the bag.

For the most part those with the big money have already taken their position on the stock market playing field. They are either in cash, short the market, long the market, or (most likely) a combination of all three. Volume has been drying up somewhat lately from our analysis. This tells us that we are in a ‘quiet before the storm’. Time will tell, it all comes down to economic data now, FOMC actions, and major corporate events.

Today we actually did have some ominous events but for the most part the smart money is already expecting these events and are just riding out their positions. It is the surprise bad news that will bring volume levels back up and start the selling in force again. This morning we got the ISM Purchasing Managers Index data for February and it has contracted into the negative growth column. A reading below 50 is considered recessionary. The top line number was 48.3, employment showed a larger decline,  and new orders is also maintaining a down ward path.

The chart below is a 10 year chart of the ISM index. Observe the trend has been declining since 2003.

 

 

 

 

 

 

 

(ISM | Data Source Moody’s Economy.com)

Also of note today was the construction spending data issued by the U.S. Census Bureau. This is more alarming in that the trend reveals to us a very deep retraction in construction. This will come as no surprise to our long time readers as we have been discussing this index for many months. But with each passing month the trend reveals that conditions are indeed getting worse. The first chart below is construction spending as measured in US Dollars. The 15 year chart shows the recession in 2000 / 2001 with a leveling off of construction spending. And then in 2002 the spending started to increase again. But our current situation reveals an even more alarming pattern in that spending in contracting in a fashion not witnessed before.

 

 

 

 

 

 

 

(Construction Spending $US | Data source Moody’s Economy.com)

The next chart is also that of the construction spending data but presented in terms of year over year % change. This chart makes it even more clear just how much construction has contracted over the past 2 years.

 

 

 

 

 

 

 

(Construction Spending Y/Y% delta | Data source Moody’s Economy.com)

In the raw data we are able to see that non residential construction (commercial construction) is starting to show weakness. Commercial real estate and construction will be the next victim of the economy and credit implosion.

Last night I showed you a chart of the S&P 500 with our technical analysis applied. We pointed out the failure of the triangle pattern on the daily chart and some resistance directly below. Today the market traded in a narrow range just at the support line. We don’t see this support level being able to hold once selling volume resumes and is why we are still maintaining our short position on the market. An updated chart is shown below.

 

 

 

 

 

 

 

 

 

(S&P 500 Daily chart)

One the the weakest sectors today was technology. The Nasdaq was the weakest of the three major indices with such names as Apple (AAPL) and Research in Motion (RIMM) adding to the declines in the Nasdaq. Any stock with an elevated P/E ratio is being chopped down to size. Always remember that in a healthy bull market stocks can survive with elevated P/E ratios, but in times of economic trouble high P/E’s are a death sentence for a stock. This is why we were warning last year about our readers taking their profits out of Apple because we saw what was coming. History repeats itself over and over again when it comes to stocks that are bought up on hype, speculation, and hope. Apple (AAPL) was no different, it was a stock that ‘everybody’ had to own as everyone in the media hyped it as the best thing since the invention of bread. Stocks like that are great for a short ride, but not a long term investment. You have to know when to take your profit and move on for once a high P/E stock has been chopped down it usually never obtains those levels again. All one has to do for evidence of this is go back to the tech bubble of 1999 and 2000 to see that. There are still many stocks on the Nasdaq with high multiples and this adds to our concern of the Nasdaq bringing the markets down much further.

The next section of tonight’s commentary deals with one stock. Converted Organics (COIN). One of our readers had asked for a chart analysis of this company and I decided to go a bit further and go into some of the fundamentals of this company as well. Converted Organics is a company that is still in it’s development stage. They have yet to show a profit and they are currently in a negative EPS situation. This company has caught some attention recently as there is some speculation that Dennis Gartman (a highly respected market analyst) has indicated that Converted Organics showed some promise (we have not seen proof of this claim). Aside from the speculation that Dennis Gartman either owns shares in this company, or merely mentioned it as a possible bright spot in the field of agriculture if it is true is not enough to justify the current price. What has driven up the price so much is that this company has been picked up by some stock picking web sites that specialize in ‘pumping’ stocks. There is an enormous amount of stock pumping taken place with this company at this time. And the share structure for COIN is such that it is a stock that can be easily manipulated.

 

 

 

 

 

 

 

 

(COIN - Share Structure)

Observe that COIN only has a share float of 4.2 million shares. This is a dangerously small amount, and the short interest is also rising. We can’t speculate on the claims of Dennis Gartman’s involvement (or non involvement) for we can not locate any proof to support either case. But regardless of that, one needs to exercise extreme caution on this stock and should be taking profits to be on the safe side. A stock with this small of a float can quickly lose 50% of its value in one day of trading. Also of note is that Converted Organics is late in filing their current quarter earnings which should have been released a few weeks ago. Not uncommon for small development stage companies to be late with earnings reports but it should always raise an eyebrow when they are not on time. We are not recommending this company for a buy or sell, we are simply pointing out the facts as they stand currently. We have no position in this company, long or short.

The chart below shows Converted Organics’s (COIN) earnings history

 

 

 

 

 

 

 

 

(COIN - Earnings history)