Stock Market Summary - May 12th 2008

Bear market rallies are the most challenging things to work with for fundamental and technical analysts. Many indicators all point towards a building thesis of a declining economy and market. However, a bear market rally always seems to find a way to defy all of the logic. Again, going back to a recent discussion on bear market rallies… it is in these bear markets that we always see the most 2% or higher one day gains then we ever see in a healthy bull market. The indecision in the market creates some of the most wildest swings you will see in a market.

Today was no exception. While the market did not gain 2% in the major indices it was still a surprise to see the indices advance at all with the bell weather stock Federal Express (FDX) report that they would not meet their earnings. And on top of that the earth quake in China had no impact on the market. The area of China that has been impacted has many industrial and manufacturing facilities. We learned today that the Chinese stock markets have suspended trading of at least 45 companies that have been impacted by the earthquake. And reports tonight are giving a very dire situation there.

Also tonight there is a growing fear of rising food and oil prices resulting from the earth quake. We have learned that PetroChina (PTR) has shut down its primary pipeline to check for damage and system testing. Mines and chemical plants in the area have also been ordered closed. Usually during any worldwide natural disaster there is a growing fear in the markets as the impact on commodities and corporations become unknown. But, today the US markets kept bidding up the prices as if nothing had happened. To me this signals that ‘dumb money’ is driving up the prices, which was also evident in the money flow data today, as well as the very low volume levels.

Another sign of a building market crash is the rising transportation index. I have gone back and looked at other periods in time when oil prices were rising. And most all of those times there was a drop in the transports in the following months as earnings suffered from the rising fuel costs. Currently the transportation index has not factored in the rapidly rising costs and the index is almost at the highs from last year. What I see unfolding is the transports heading back down soon and the rest of the market follows with it. I can’t say if the broader market will turn before the transports, but once the transports do fall, it adds to the weight pulling down the rest of the market.

Before I go on to charts tonight I have some more information coming out of China regarding corporate impact. Toyota Motors (TM) reports that one of their facilities has been impacted and is examining the facility to determine when production can resume. China Mobile (CHL) says that 2,607 of their cell towers have been destroyed.

Hopefully the charts tonight will be easier to view… I changed the color scheme.

 

 

 

 

 

 

 

(Dow Jones Transportation Index)

 

 

 

 

 

 

 

 

(NYSE - Weekly Chart - Weekly Chart)

 

 

 

 

 

 

 

 

(S&P 500 [SPY] Weekly Chart)

 

 

 

  

 

 

 

 

(Nasdaq [QQQQ] - Weekly Chart)

 

 

 

 

 

 

 

 

(Russell 2K - Daily Chart)

 

 

 

 

 

 

 

 

(Apple [AAPL] - Weekly Chart)

 

Technical analysis of charts is part science and part artistic interpretation. Technical analysis is the study of price movements, and from that movement we arrive at an educated evaluation and prediction of future events. When one studies technical analysis, he or she always begins with the basics of price support and resistance, then on to patterns, indicators, moving averages, bollinger bands, Fibanocci price and time series, and on and on. But, after all of the learning of the scientific methods, there is still an artistic approach that is required. The first thing I do when ever I see a chart for the first time I only stare at it with no indicators, no trend lines, no oscillators, nothing…  only price bars. No matter how powerful a computer you have, and no matter how expensive of a charting program you use, there is still nothing better then the gray matter between your ears to filter out the noise of the market and see the patterns in the price action jump off the screen at you. Like an artist painting a portrait he or she will stand back and view the subject very carefully before the very first stroke of the brush. The same applies to technical analysis of price movements.

While technical analysis is rooted in mathematical formulas, it is still the study of people buying and selling. And while people have attempted to make human existence into something that can be measured, predicted, and quantified by mathematical formulas for centuries… there still is a part of human nature that which can never be quantified. And for that part we still have to use the brain to perform part of our technical analysis of what’s behind the price movements.

In the case of today it was volume that jumped off the screen. And it was the lack of it that was important today. Increasingly rising prices on lower and lower volume is something that should never be ignored or over looked. Lisa and I have, and still maintain the thesis that this is a bear market rally, the markets are going to fall, and that the economy is going to get worse. We have studied this for many months and it remains our core thesis to which we still hold. As is always the case in the stock market people let price movements change their opinion as the emotion of the market gets the better of them and they throw out the window everything they have studied and believe to only ‘chase’ the market. And in the end get run over as the car backs over them as they chase after it.

These are still very dynamic and wild times in the market. The battle between the bears and bulls reminds me of the old feud between the Hatfields and the McCoys.

I shorted Apple today as it continued to tickle the trend line shown in the chart above. My objective is for a gain of 15 to 25%, it will not happen overnight, but in the coming days to a few weeks I see the potential for Apple to roll over rather hard. The trend line is the stop point.

I am also short the DOW (DXD) in my long term portfolio as my thesis remains intact for a declining market. My DXD trade still on from my entry at 12750. Today I added a short on the S&P 500 (SDS) as the very low volume was signaling an ever increasing end to this current rally.

The blog makes it difficult to communicate in real time with our readers. And that is why we are still working on our new web site. It has been a while since I have mentioned our new site, but I can assure you that it is still being worked on and when it is turned on it will be much easier for our members to communicate with us, and vice versa.

From the wire tonight:

BROKERAGES: OPPENHEIMER’S WHITNEY CUTS THE Q2 EPS ESTS FOR US BROKERS BY 41%; 2008 EPS EST CUT BY 48%; WHITNEY SAYS THAT THE OUTLOOK IS MORE BLEAK THAN REFLECTED
- Goldman’s Q2 EPS est cut to $3.48 from $4.09, FY08 EPS est cut to $14.65 from $17.35.
- Lehman’s Q2 EPS est cut to $0.72 from $1.10, FY08 EPS est cut to $3.45 from $4.43
- Merrill’s Q2 EPS est cut to $0.20 from $1.00, Cuts FY08 est to -$0.45 from +$1.15

Until tomorrow… good night to all.

Market Close - May 12th 2008

Is there a parallel universe? If there is it crossed Wall Street today. Markets advanced on essentially nothing good. FedEx earnings warning, earthquake in China, declining corporate earnings, and on and on.

If you look at today’s volume levels it was downright terrible. A 130 point advance on the DOW with lowering volume is a warning sign that the bulls may have their dangling parts handed to them on a platter soon. There was a lot of negative money flow within the very stocks that advanced the major indices today.

 

 

 

 

 

 

 

 

 

 

(Data Source - Wall Street Journal , Money flows)

In the data shown above you can see that many big cap stocks were selling on the price advancement today. So while small money was bidding up the price, the large money was cashing out.

Recall that I mentioned last week that corporate earnings were getting worse. Now we have the proof. In my commentary on May 5th I wrote that revenues were down 18% compared to one year ago. That was of the 2,058 companies that had reported up to that date. Now, with 2,807 companies having reported their earnings the earnings are now down 26% compared to last year!  I mentioned that my back of the envelope calculations showed me that earnings were deteriorating, and the proof is in with more and more companies having reported their earnings.

Charts and more tonight…

Market Close

I’m short handed today… will have a market close in a short while.

Market Update 2:15 pm

Total market volume remains at very low levels. Advances in the market are not on any specific news or event. On the contrary, mostly bad news this morning. Federal Express, which lowered even further their earnings guidance traded up after its initial gap down this morning. The market is desperate to keep reaching for higher highs, but the lower volume is the devil in the details.

I am holding shorts on the SDS, DXD, TWM, and AAPL. 

IF you are currently NOT holding any short positions, then wait until this evening when I update the charts for identification of any changes for entry. If you are holding shorts currently, we are still comfortable with holding them at this time. This market advance is very UN-convincing at this time. 

Market Update - 11:40 am

Market is up on extremely low volume. NYSE volume about 40% below the six month average, Nasdaq trading volume about 30% below the six month average.

Nothing at all is currently moving this market. It has all the appearances of a crash setting up. No recommendations have changed here. We remain short the market via index ETF’s.

Stock Market - Pre Open Report May 12th 2008

Futures have begun to drop back down after running up to resistance in the early pre dawn hours. Earnings reports this morning have been less than stellar, and in some cases just terrible. This week there is a Federal Reserve ‘talking tour’ (see schedule posted yesterday).

 

From Reuters this morning:

April retail sales barely budged: SpendingPulse

Mon May 12, 2008 5:25am EDT

NEW YORK (Reuters) - Retail sales barely rose in April, as a relentless surge in gasoline prices made consumers cut back other types of spending, according to a report released on Monday.

Consumer spending excluding autos grew only 0.1 percent last month on a seasonally adjusted basis, less than the 0.6 percent increase in March, said SpendingPulse, the retail data service of MasterCard Advisors, which is a unit of MasterCard Worldwide.

"In general, consumers are spending less. Without gasoline, they are spending a lot less," said Kamalesh Rao, director of economic research at MasterCard Advisors.

Retail sales excluding cars and gasoline fell 0.7 percent in April versus March. [...]

 

From Bloomberg this morning: (the bond insurer soap opera continues)

MBIA Posts Loss of $2.4 Billion as CDO Slump Deepens

By Christine Richard

May 12 (Bloomberg) — MBIA Inc., the bond insurer that lost 87 percent of its market value in the past year, posted a net loss of $2.4 billion as the slump in mortgage securities deepened.

The first-quarter net loss was $13.03 a share, compared with a profit of $198.6 million, or $1.46 a share, a year earlier, Armonk, New York-based MBIA said in a regulatory filing today. Unrealized losses from derivatives were $3.58 billion.

The loss was MBIA’s third straight and comes less than three months after the bond insurer successfully retained its AAA credit rating. MBIA, Ambac Financial Group Inc. and the rest of the industry have posted record losses after misjudging the value of collateralized debt obligations and securities backed by home- equity loans they guaranteed. MBIA, once a dominant provider of municipal bond insurance, had 2.5 percent of the market in the quarter, according to Thomson Financial data.

“We’re not out of the woods yet,” said Richard Larkin, senior vice president at Herbert J. Sims & Co. in Iselin, New Jersey. “I’m not sure AAA bond insurers will ever be viewed the same way as in the past.”

MBIA raised $2.6 billion in capital to help convince Moody’s Investors Service and Standard & Poor’s to preserve its AAA rating. Chief Executive Officer Jay Brown said this week the company won’t need to raise more.

“We have adequate equity capital to get through this crisis,” Brown wrote in a letter to shareholders published May 6.

MBIA fell 21 cents to $9.22 in early New York Stock Exchange composite trading. The stock traded above $70 a year ago. MBIA’s book value slumped to $8.70 a share on March 31 from $29.16 at Dec. 31, in part because of new shares sold in the capital raising.

`No Longer’ AAA

MBIA estimates it will have $827 million of actual losses from paying claims on nine CDO transactions.

“Earnings pressure will remain for several quarters as writedowns continue,” Peter Plaut, senior vice president at Imperial Capital, wrote in an e-mail today. “This is no longer a AAA industry for the players that diversified into volatile financial derivatives.”

MBIA took $3.5 billion of writedowns in the fourth quarter of last year, mainly on CDOs it guaranteed through derivative contracts. Those contracts, backed by the repayment of subprime mortgages, have contributed to $323 billion of losses at banks since the beginning of 2007. Derivatives are financial instruments linked to stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather.

`Mere Mortals’

“This valuation task is clearly one that stretches the ability of mere mortals,” Brown said in the letter.

New York-based Ambac, the second-largest bond insurer, reported on April 23 a first quarter net loss of $1.66 billion, wider than analysts estimated, after $3.1 billion of charges related to mortgage securities. New business at Ambac slumped 87 percent after municipalities balked at buying its insurance and sales of CDOs dried up. Ambac shares tumbled 43 percent on the day of the announcement.

The bond insurers faltered after expanding beyond municipal debt into subprime-mortgage securities and CDOs, which package pools of debt into new pieces with varying ratings and risk. As subprime defaults soared to records, MBIA and Ambac were forced to write down their value.