Stock Market Summary – May 14th 2008

An insult to reality…

That is what this mornings inflation data did to every intelligent person in this country. For the Government to claim that energy costs dropped in April is of course untrue. But, the mathematical model that the Government uses to arrive at their final numbers is slow to react to reality. It will take time for the real world inflation to work their way into the Governments statistics.

But where this presents a large and potentially catastrophic problem is that all monetary decisions by the Government and corporations are all based on the ‘official’ data. So with the data today saying inflation dropped a tick, when in reality it has ramped up by a rather large amount, creates a false read on the real economy… at least a lagging read on it. So as millions of Americans who rely on Social Security are hopeful of an increase in their checks they are going to get very little adjustments to their income. In the real world they are spending much more in order to get by everyday.

Where does that lead? It leads to more and more people spending less on discretionary items as money has to go to heat, electricity, food, and gasoline. It is no wonder that the US Government has started running radio advertisements for the food stamp program. A local radio station in my area has begun running 30 second commercials for food stamps, in the commercial (or public service announcement), a soft spoken woman speaks about the hardships of making ends meet. And that there is no shame in applying for food stamps to help pay for food. The same government that is telling the American people the the fundamentals of the economy are strong is telling them how to apply for food stamps. Am I the only one that sees a problem with this?

The media is jumping all over the reported inflation data from this morning and making statements about how it was not as bad as thought. Tell that to the 175 million vehicle owners in this country that inflation is under control. And tell them that when they go to the food store and are paying substantially more for many food items now. Thank goodness there were some smart people in the market today, they know the real story. It is only the people that are easily influenced by the media and the CNBC stock pumpers who are the ones who keep buying over priced stocks in a declining economy.

Today’s very quick reversal in the market was a potential turning point. When watching the S&P futures on a 5 minute chart today it was very clear that the morning rally was losing volume as the day went on. Then, as bids started to dry up as the indices reached resistance levels again the volume picked up rather quickly and the selling started. And the volume on the selling continued to rise all the way into the close as the market kept selling down.

Momentum stocks were the first to take a whack and started a fairly impressive sell off in the span of only 90 minutes. Recall that I discussed Apple in particular was approaching a long term trend resistance point and is why I took a short position on the stock. The chart below is that weekly chart showing the long term trend line, and the second chart is the last few months of that chart blown up. Notice that Apple touched the trend line and the sellers took it back down today. The print on the tape shows that a reversal trend may be now starting. Nothing can be proven in one day, but the sell off in Apple today was rather strong so the next few days should tell us if the trend is indeed reversing. If your already short, the trend line remains your stop out point.

 

 

 

 

 

 

 

(AAPL - Weekly Chart)

 

 

 

 

 

 

 

 

(AAPL - Weekly Chart blown up)

 

The next chart is the S&P 500 futures. This is a 5 minute chart from just today, notice the rise in prices as volume kept falling. And then as prices fell the volume increased. This is the classic sign of the market still advancing on low volume and selling on heavy volume. A healthy bull market is just the opposite.

 

 

 

 

 

 

(S&P Futures - 5 minute chart of 5-14-2008)

 

And one final chart tonight. This is a daily chart for the S&P 500 (SPY). Trend line was a stopper today.

 

 

 

 

 

 

 

(SPY - Daily Chart)

 

So what happens next? It is clear to us that indecision remains strong in the market. Even as the prices have been advancing the indecision is strong which is evident by the low volume levels. Every day we are seeing levels 20% or greater below the average, that tells us that there is a significant lack of confidence in this market and the money is just not being pumped in to it in any convincing manner.

We are just about near the end of this quarters earnings season. What do you think is going to happen in the next quarter? It is this quarter that inflation has rapidly risen, and consumers are really being hit hard over the last 6 weeks. So the next quarters earning are likely to be even lower than this current quarter. And the stimulus checks? Well, according to the latest poll that money is going for gas (see below).

Remember, it is the economy that is the problem. The credit crisis is just a symptom of the economic down turn and not the cause. Eventually everybody is going to remember that its the economy that is the problem here. Too many people got side tracked into thinking the banks and credit crisis was the real problem and now that it has stopped bleeding (for now) think that everything is OK again. But its not, it is still the economy that is worsening which is going to bite the bulls in the butt when they least expect it.

Tomorrow is the weekly jobless claims. Everyday anymore is an interesting day and tomorrow will be no exception. Remember that options expiration is on Friday and they are always wild weeks.

 

WSJ LOOKS AT HOW US CONSUMERS WILL USE THEIR STIMULUS CHECKS
- According to a survey by National Retail Federation- 42% more respondents, or 17.2M people said late last month that they plan to use a portion of their tax rebate for gas v 12.1% of those polled in Feb.
- 3% more people said in they will spend the money on everyday items such as food.

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WSJ IS CAUTIOUS ON FEDEX AND UPS
- The article notes that growth in international deliveries is slowing as industrial production in Asia slows.

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GLOBAL OUTLOOK: THE OECD’S EARLY WARNING SIGNAL IS FLASHING CLEAR SIGNS OF ECONOMIC WEAKNESS ACROSS THE WORLD, WITH MOUNTING EVIDENCE THAT CHINA, INDIA, AND BRAZIL MAY SOON SUCCUMB TO THE DOWNTURN - AMBROSE EVANS-PRITCHARD AT THE TELEGRAPH
- "The closely-watched gauge - known as the Composite Leading Indicators (CLI) - has picked up a sharp deterioration in the eurozone in March, notably in Italy and France where the advance signals are falling even faster than in Britain. The measure tends to anticipate the industrial cycle by about six months."
- "While growth continues to power ahead in most emerging markets, rampant inflation is starting to damage business confidence. "The latest data point to a potential downturn in Brazil, China, and India," said the OECD, the club of rich nations."
- "Europe faces an incipient "stagflation" as inflation of 3.3pc combines in a nasty cocktail with slowing growth. The mix poses an acute dilemma for the European Central Bank. It fears that 1970s-style inflation could become lodged in the system as workers push for higher wage deals."

Market Close

The volume remains abysmal. It’s options expiration week and this market is having major trouble sustaining itself, let alone reaching new highs.  There is selling into the up-bids, very decent selling on some Dow components. We’ll have to see what kind of candles are left on the charts after this afternoon’s reversals on the indices.  Agilent (A) reported good headline numbers, but I haven’t dissected the earnings yet.  See you later this evening!

MARKET INTERNALS UPDATE AT 3:30PMET

- NYSE volume 900M shares, about 30% below its six-month average; advancers lead decliners by 1.7:1.

- NASDAQ volume 1.72B shares, about 4% below its six-month average; advancers lead decliners by 1.1:1.

Market Update - 2 pm

I watch in amazement the trading action today. Once again the market advances right back to resistance levels on very low volume.

MARKET INTERNALS UPDATE AT 12:00PMET

- NYSE volume 470M shares, about 25% below its six-month average; advancers lead decliners by 2.5:1.

The excitement generated this morning by the ‘lower than expected’ inflation data is a death march to the slaughter house for the bulls. What the Governments data this morning has done is further reduce the spending ability of millions of Americans. Remember that Social Security payments are adjusted for cost of living adjustments. And that adjustment is for the most part based on the consumer price index data.

Retired citizens, living on social security, and are paying much more in real life for food and heating/gas will be further squeezed into having to make a choice of whether to eat or buy medicines. Just because the model that the Government uses to calculate inflation does not reflect reality. The model is broken, period.

So what happens next? The government gives the market a boost by surprising it with lower inflation data. But, soon the people who need COLA adjustments will be further in the hole. So much for consumer spending coming back to life. It is completely amazing how the Government statistics disguise the real economy. And, please don’t tell me that it all comes out in the wash eventually. What happens it that it does come out eventually, but not cleanly, it comes out dirty and ugly as the implications of the data has a “real” impact on peoples lives. I will have more on this subject tonight.

Right now, be very careful thinking that this is a time to go long. This rally is dangerous to think it is safe to go long, on the contrary… it is leading to one of the biggest market sell offs we have seen in a great while.

Oil Inventory

Not the “build” expected.  Here are the numbers:

DOE CRUDE: +176K V +2ME; GASOLINE: -1.7M V -250KE; DISTILLATES: +1.34M V +1ME; UTILIZATION: 86.6% V 85.7%E

*API:

- Crude: +660K

- Gasoline: -1.5M

- Distillate: -2.35M

Stock Market - Pre Open Report for May 14th 2008

Excuse me for a moment, I have to stop laughing at the CPI data released this morning. Europe keeps screaming about how inflation is getting worse and is threatening to raise their rates to combat it. But here in the US they just keep saying it is ‘contained’.

Official numbers this morning:

APR CONSUMER PRICE INDEX M/M: 0.2% V 0.3%E; CPI EX FOOD_ENERGY M/M: 0.1% V 0.2%E; CPI NSA 214.823 V 214.730E
- CPI y/y: 3.9% v 4.0%e
- Core CPI y/y:  2.3% v 2.4%e
- No revisions to prior month data

 

 

 

 

 

 

 

 

(April CPI data - Data source: US Gov’t BLS)

 

The headline growth was lower than expected. And they claim that energy costs did not grow at all in April! I would love to know how they arrived at that figure!

 

Freddie Mac (FRE) got downgraded to junk status:

MOODY’S DOWNGRADING FINANICAL STRENGTH RATING TO B+ FROM A- (BELOW INVESTMENT GRADE TO JUNK STATUS)

 

With the better than expected inflation data the futures shot up in the pre market. Amazing, we will just keep watching how this plays out. Options expiration weeks can be unique and bizarre, so far this one is no exception.