Stock Market Summary - May 20th 2008

Any offensive positions must now be switched to defensive. It is our view that the market has entered into the next transition phase and defense is back on the top of the list for any of you who have been holding ‘long positions’.

There are those in the media, analysts, and others who have been claiming that the lows reached back in March was "the bottom" and that it was ok to be buying on the dips for the "long haul" as the market was going to rally to new all time highs soon. That kind of bullish talk is what has fueled a good part of the market over the past two months, on low volume I might add, into a feeling of complacency. But, as you are all aware, Lisa and I never deviated one bit from our thesis of where this economy and the markets are going. We made our bear market claim in November last year, and warnings as far back as last July.

Over the past two months many investors and traders (not us) switched from playing defense to playing offense. While that is fine on the quick day trades, the longer term investors and/or traders need to make the switch back to defense. A couple weeks ago I wrote that the market had handed you a gift if you were a long term investor with long positions. And that gift was an opportunity to get out. That is what playing defense is all about. If you are sitting on gains, and the market is teetering on a long and extended bear path, then it is wise, smart, and prudent to take your gains off the table. There is no "what if it goes up another 5%", or "I might miss a big run"… You have to get that kind of investing methodology out of your head.

Defense is all about capital preservation, not speculating that you might miss out on the next "big rally". If someone hands you a $1,000 dollar bill on the street, and tells you that you could add another $500 to it by playing a game of chance with the stranger would you do it? Now, the rules are that you could simply say no to the challenge and walk away with the $1,000, or if you play the game with this stranger, and you lose, you lose the $1,000, the additional $500 that was up for grabs, and an additional $500 out of your own pocket. Now, what would you do?

Now make that $1,000 your own money, still want to play games with it and risk losing it?

The point I’m trying to make here, and why it is so many long term investors always lose out in the end, is that many investors and traders never learned when to say "I’m going to play defense", and instead leave their money exposed to the storm that may blow it all away, even when they had a weather forecast telling them a storm was on the way. So when I said the market handed you a gift a couple weeks ago, it was akin to the stranger in the street coming back and giving you part of your money back out of kindness. What would you do? Take the money or play the game with him again as the storm around you is brewing up again?

Mark Douglas, author of "Trading in the Zone", examines the psychology of this very topic and many others. In his book he writes extensively what it is (and why it is) that investors and traders fail to recognize risks and take appropriate action. Additionally, he helps you comprehend discipline and a plan for the "what if" that the markets presents to us. If you have not already read Marks’s book I strongly recommend it. If you read his book, and follow the teachings, then when someone hands you a $1,000 dollar bill you will grab it and run.

The market is at a point that could very well be the beginning of the next leg down. And it is also entirely possible that the next leg down will be longer and deeper than what we have already witnessed. This is not to say we will not have bounces along the way, but the future looks to be getting worse for the financial markets. Defense should always be your number one priority, but now, it is paramount.

The coach has called a time out, and you and your team must go over your defense plans in order to win the game. Have you blown the whistle yet? Have you developed your defense strategy? Or are you going to just "Hail  Mary" and hope?

The financial sector appears to be breaking down once again. Long term views of banks and other financial institutions remains poor for the long run.

 

 

 

 

 

 

 

(XLF - Financial Sector)

 

 

 

 

 

 

 

 

(Gold - GLD)

 

We are in the period of transition now. It is in these times that some wild up and down swings will be taking place more and more. The S&P 500 has shown us her hand, and her hand is 1440. That is where the line in the sand is now.

Market Close

It was a red day just about everywhere. Oil continues it’s march upwards and the market acted as if it was the first time they knew inflation would be a problem.

PPI data this morning was on the surface flawed, we all know that. Energy costs did not decline, but their model said it did. But, aside from the top line number, the core showed inflation growing at a rate the markets don’t like. Hey, we gave them plenty of warning that it was coming!

Gold has been making decent gains once again. I’ll take a closer look at the GLD chart tonight. The US dollar has resumed its slide downward.

HPQ earnings:

REPORTS Q2 $0.87 V $0.85E, R $28.3B V $28.1BE (IN LINE WITH THE PRELIMINARY GUIDANCE ISSUED LAST WEEK AFTER THE EMC MERGER ANNOUNCEMENT)

- Guides Q3 EPS $0.82-$0.83 v $0.82e, R $27.3-27.4B v $27.4Be

- Guides FY08 EPS $3.54-$3.58 v $3.53e, R $114.2-114.4B v $114.2Be

- Q2 operating margin 9.2%; Non GAAP: 10.0% v 9.9% q/q sequential

- guidance is also unchanged from last week’s preliminary release

HPQ is trading lower after hours on the lower margins announced by the company. When margins start getting squeezed, then it is a known fact that there is only so much juice you can squeeze out of an orange before it goes dry.

More tonight…

Market Update - 12:30 pm

Markets are selling down as inflation is finally being recognized as a problem for the markets. All they had to do was ask us… LOL

Meredith Whitney, an analyst for Oppenheimer who has broken from the mold and been speaking out about the banks, financial institutions, et. al. and how they will suffer. She has been making some very good calls on dividends and other capital raising requirements of banks and proven to be right when her peers were pumping the stocks (Dick Bove).

This morning she says:

“The real harrowing days of the credit crisis are still in front of us and will prove more widespread in effect than anything yet seen”

We have no disagreement on that point at all, we have been saying this for a long time.

MARKET INTERNALS UPDATE AT 12:00PMET

- NYSE volume 465M shares, about 27% below its six-month average; decliners lead advancers by 3.1:1.

- NASDAQ volume 870M shares, about 3% below its six-month average; decliners lead advancers by 2.1:1.

Volume levels today are still below the six month running average, however they are higher than on the recent up days. So the volume is stronger here on this sell off. And it appears to be picking up steam as the day continues.

Stock Market - Pre Open Report for May 20th 2008

APR PRODUCER PRICE INDEX: M/M: 0.2% V 0.4%E; PPI EX FOOD_ENERGY M/M: 0.4% V 0.2%E
- PPI YoY: 6.5% v 6.7%e
- PPI Ex Food_Energy YoY:  3.0% v 2.9%e

 

APRIL PPI TABLE
                                                APRIL      MAR.      FEB.

PPI, Finished Goods            0.2       1.1       0.3
PPI, Ex. Food, Energy           0.4       0.2       0.5
Energy                                    -0.2       2.9       0.8
Foods                                      0.0       1.2      -0.5
Consumer Goods                 0.1       1.3       0.3
Residential Electricity         1.2       1.1      -0.4
Residential Gas                   5.4       4.2       5.7
Gasoline                              -4.6       1.3       2.9
Home Heating Oil               2.2      13.1      -3.7
Drugs                                    0.7       0.4       1.3
Autos                                    0.4      -0.2       0.8
Tobacco                               0.1        0        0.1
Capital Equipment             0.4       0.1       0.5
Intermediate Goods           0.9       2.3       0.8
Ex, Food, Energy                1.2       1.1       0.6
Crude Goods                       3.2       8.0       3.7
Ex. Food, Energy                7.9       3.5       3.3

 

Core inflation is rising faster, duh!  And the top line number is bogus as we all know for it still claims energy costs have declined.

The market is acting this morning as if it is surprised by the core inflation starting to head up at an uncomfortable pace, and the futures are heading down. We knew inflation data was going to get worse so it is no surprise to us.

I received a chart from our member ‘Steve’ today of the Dow Transports. Thank you Steve, we love it when our members take an active participation.

 

 

 

 

 

 

 

 

 

(Dow Transports - Source: RebelTraders Member - Steve)

Thanks Steve!

 

AIG: CEO SAYS WILL RAISE $20B IN CAPITAL - WIRE CITING INVESTOR CONF

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T. BOONE PICKENS SAYS WORLD OIL SUPPLY FALLING, PRICES CONTINUING TO RISE; COULD SEE $150 PER BARREL IN 2008 - CNBC INTERVIEW
- Believes only natural gas can compete with oil.
- Adds that speculators have nothing to do with high energy prices. "Oil prices are not a bubble."

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United Kingdom:  MOODY’S SAYS DELINQUENCIES ON THE RISE; HAS NEGATIVE OUTLOOK FOR UK CEDIT CARD SECTOR - WIRE CITING REPORT

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Home Depot (HD) - SEES SIGNIFICANT INVENTORY OF HOMES, SEES MORE RISK THAN OPPORTUNITY THIS YEAR  - CEO
- CFO: All departments had "negative sales growth," sees "softness in big ticket, construction," says average ticket dropped 2.8% in Q1.
- Sees "more risks than opportunities" in remainder of 2008.

 

"If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children will wake up homeless."

- Thomas Jefferson

 

Opitz: We agree 100%.