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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.