Santa's More Drunk Than Hangover?

FUNDAMENTAL ANALYSIS
While I thought Santa Claus's only on a hangover yesterday, it sure seems like he is still drunk. Market continue to be thinly traded today as investors continue to linger in the holiday mood. In fact, Larry Kudlow and Dylan Ratigan are both still on holiday! If these die hard market guys are on holiday, no wonder the rest are too. The few participants in the market today are greeted by the assassination of Pakistan's Bhutto, shaking the middle east a little as well as durable goods orders coming in much lower than expected. Finding themselves few and lonely, the only thing these few investors could do is to take some profit off the table after a 4 days run. What happens when a thinly traded market sell off? Yes, the effect is much greater than in a heavily traded market. Bond yields returning to contango and rising gold prices today, indicated a small flight to quality. There is still no reason to be really pessimistic nor optimistic now. Hold on to your hats.

TECHNICAL ANALYSIS
Volume continue to be extremely low today, making technical analysis based on volume and price indicators highly inaccurate. I shall maintain my previous technical view and see how the rest of the year unwinds over the final 2 trading days.

Santa's Still On Hangover...

FUNDAMENTAL ANALYSIS
The Dow was under some early pressure today as retailers turned in a disappointing number as the retail sector was usually the sector that lights and powers the Santa Claus rally. However, early pessimism was quickly overtaken by the prevailing bullishness and probably some window dressing effort. More and more investors are believing in a full scale Santa Claus rally and behaving as such. I do see more and more votes for ending the year higher these few days at my poll here PLUS institution sentiment is rising on my Institution Sentiment Index. Even though I am not seeing any hard numbers that should power the Santa Claus rally, I am still believing in it and that Santa today is merely on a hangover. :)

TECHNICAL ANALYSIS
The low volume today does make technical analysis quite ineffectual since volume is one of the 2 main components of technical indication. From the chart pattern, however, I see no reason why the Dow would not continue higher even though it might just go sideways for a couple of days before doing that.

MERRY CHRISTMAS!!!!!!!!!!!!

Hate to say this but as traders, we rarely get to enjoy the full festive moods as markets are open on the eve of every holidays, even if it is only for half a day. This is going to be a relatively calm week as there isn't much in the way of market moving economic datas (see economic calendar. Which also mean that there really isn't any reason why the Dow would not follow it's technical bullishness inclination and probably make a new high by the end of the week! :) Well, at least that's the way I see the Dow ending the year.

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The Market SPEAKS!

Yes, the answer that we have been waiting for whole week is revealed at last! The market has decided to go UP! The up day on Friday has broken the high of 17 Dec and turned the pullback in the reaction rally around. This has totally broken the downtrend and begun a new bull trend in accordance to the Dow Theory! All these happened in conjunction with better earnings, higher consumer spending and the VIX coming below 20 for the first time since 18 Oct.

In fact, investors are fast coming to the realization that the so-called credit crunch is very much contained within the residential property market only and corporate loan default rate remains a low 0.9%, which is extremely low for recessionary times. In a real recession, corporate loan default was as high as 4.5%! It does seem like companies are not feeling any of the impact that the banking guys are just yet. But if banks are feeling a liquidity crunch, wouldn't that affect company growth? Not if the banks get additional help quickly and they have! Sovereign wealth funds from Abu Dhabi, China and Singapore have stepped in to provide liquidity to major banks in order to tide through this crisis and I am sure with today's globalization, any recessionary pressure would be moderate. Globalization as well as experience learnt through the past few recessions have taught leaders how to avoid or cushion the impact of any recessions and it seem to be the case so far.

Well, there are 5 more trading days before the end of the year and plenty of time for Santa Claus to do his stuff! Enjoy the Ride and the Holiday! :)

Drums Still STILL Rolling....

GDP beat my expectations as it remains stagnant at 4.9%, testimony of the strength of this economy. On the soft side, jobless claims are up once again and PCE deflator was up too. But does all these matter? Apparently not today. The Dow remained sideways today with declining volume as investors wait for the market to decide whether it wants to go up or down. Total equity put call ratio DIVED today (see daily put call ratio )as traders rushed for call options as a risk limited mean of not missing out should the market stage a rally. All in all, it is a volatile market waiting to explode one way or another and with the triple witching tomorrow, you can expect even more volatility.

Drums Still Rolling......

FUNDAMENTAL ANALYSIS
The Fed injected another 20billion into the banking system at lower than discount rate, the AMT tax is abolished at last and... did absolutely nothing for the markets. The market is definitely waiting for something in the GDP numbers tomorrow (see stock market calendar). I expect the GDP number to be slightly weaker tomorrow but what I cannot predict is the market's reaction to it. In fact, the market seems to be more technically than fundamentally driven lately.

TECHNICAL ANALYSIS
What I expected to be a critical day today ended sideways again BUT the drums are still rolling. The Dow can still make a giant break to a giant rally if it rise and beat the 17 Dec high within the next few days. Of note, the Dow actually made a higher high and a higher low today, which makes it a bullish day instead of a bearish day! Right now, stock options traders will be in a great advantage with a straddle or strangle on the market right now.

Dead Cat Bounce?

FUNDAMENTAL ANALYSIS
Worries about the US economy took the market down early before buyers still betting on a Santa Claus rally rushed in for a deal, taking the market back up by the end of the day. So, what changed today? Nothing really. Housing Starts and Housing Permit numbers today (see economic calendar) continued to paint an ugly picture of the housing market, both plunging by 3.7% and 1.5% respectively. So, what's the deal with the rebound on the second half of today? A Dead Cat Bounce?

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TECHNICAL ANALYSIS
Not surprising to see a couple of small candle days after 2 huge triple digit ditches. However, if the Dow continues strong tomorrow, closing higher and perhaps beating the high of 17 Dec, it could be the start of the turnaround that I have been talking about for the past few days! Which means Santa Claus rally might be late but it certainly is coming! So, once again, we are in critical times. Here's a case for a rebound... the 200MA crossed and moved above the 30MA, indicating a grossly oversold condition in the Dow. Every time that happened over the past few years, the Dow moved up higher significantly for the short term and long term. Weekly chart still look great as the Dow found great support on the 50WMA. So, technically, there are more evidence to upside than downside and all it takes now is for some big institutions to catch on and act on it. :)


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STAGFLATION???

FUNDAMENTAL ANALYSIS
With so many analysts out there, including ex-fed chairman Greenspan himself, expecting a recession and other analysts, including myself, expecting rising inflation, Greenspan consolidated all views and suggested that the US economy is really going into a STAGFLATION!

So, what in the world is STAGFLATION?

STAGFLATION is one of the most complex and dangerous economic condition any economy can get into and is characterized by a gradual economic downturn along with rising inflation. In layman terms, STAGFLATION means RECESSION + INFLATION! Wow, how's that for pleasing both camps and stunning investors? In a STAGFLATION economy, neither rate cuts nor rate hikes actually work because rate cuts increase inflation while rate hikes increase the possibility of recession! So, how's that for a sticky situation? I see actual numbers pointing to inflation for months but I have yet to see any actual numbers pointing to an economic downturn. So far, economic growth, productivity and employment has been improving all year long! I am shocked someone as experienced as Greenspan can come out talking about recession one day and then stagflation the very next day. These 2 conditions are VERY different! (lets not even talk about his crazy idea of a full cash bailout of the subprime mess which is going to rocket inflation to the moon!)

TECHNICAL ANALYSIS
The pullback continues today as expected... let's continue to wait for when the turn around happens.

No Doubt Another Volatile Week Ahead...

There is no doubt that this is going to be yet another volatile week!

GDP numbers will be release on Thursday and equity options are expiring this Friday. (see stock market calendar) Both events are certainly going to be the main contributors of volatility this week.

As I mentioned last Thursday, recessionary fears are quickly being overtaken by inflationary fears as the Feds' inappropriate rate cuts have caused inflations to rise out of hand while doing nothing for the stock market... a lose lose situation. Inflationary concerns are further fuelled by last Friday's CPI numbers as it turned out higher than analyst expectations, as I have expected. What I did not expect was the sheer magnitude of the rise in CPI... the STEEPEST rise since Sep 2005 and the HIGHEST core CPI since April! These numbers are defintely the manifestation of the damage done by the past 100 points rate cut by the Feds yielding under the pressure of the market! Year over year headline CPI number now stands at an ugly 4.3%! That's way higher than the Fed's unofficial comfort zone of about 2.5%! Such a number should warn the fed against further rate cuts.

The Dow reacted to the CPI numbers and continued its path downwards on Friday, officially marking the start of the reaction rally pullback. As the Dow theory suggests, if this pullback turns around before it hits the November lows, the Dow could resume its primary bull trend but if it reaches and exceeds the November lows, we could see the Dow laspe into a full scale bear market... the first of its kind since the crash of 2000!


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Recession Out & Inflation In?

FUNDAMENTAL ANALYSIS
I have spent so much time over the past month trying to convince the world that the US market is far from going into a recession and today's PPI numbers proved that the balance of fear is swinging gradually from recession fears to inflation fears. PPI, the Producer Price Index, posted the BIGGEST gain since 1973! The last time PPI was this high, the market went into a 2 years bear market! Very simply, Producer Price Index or what is commonly known as the wholesale inflation, measures the cost of producing goods, which is inflation experienced by producers. The PPI is an important number but not as important as the CPI number that comes next. Producers do not adjust prices monthly, passing on inflation to the consumers. Most producers "bite the bullet" and ride out wholesale inflation without raising prices in order to maintain competitiveness. The CPI or Consumer Price Index is due tomorrow (see stock market calendar) and would definitely rock the market. Obviously we are going to see slightly higher numbers with the series of rate cuts over the past months and Uncle Ben will see for the first time the consequence of giving short term pots to the market and losing sight of what he is really supposed to do.

TECHNICAL ANALYSIS
Another sideways, high volatility day in the Dow. What usually follows a series of such movements is one big committed move to either upside or downside and so far, pessimism still seems to be the name of the game and the balance still weighs to downside as the Dow trades comfortably within its linear regression channel pointing downwards. Interestingly, the 30MA is now crossing the 200MA once again, indicating an extremely oversold condition. Most of the time when 30MA crossing 200MA from the top, the Dow makes a rally... at least a short one. If this works out this time, it could help the Dow break above its regression channel and establish a new trend.


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Knee Jerk...

The Fed's unprecedented collaboration with international central banks caused a scale 6 earthquake knee jerk in the market today. Did you remember the last time you had a knee jerk when you were young? Yeah, the taste of dust still in your mouth, huh? Today's a classic knee jerk in a market looking to go down further. With the senseless overreaction today, I am more convinced then ever that Santa Claus isn't coming to Wallstreet this year.

Is This Even A Surprise?

Many investors are shocked that the market sold off today even when the Fed cut 25 basis points... these people obviously are not following my blog like you are.

Like I mentioned a few days ago, the market has already priced in more than 25 basis points cut! In fact, it has priced in a 50 basis points cut! That is why 25 basis point cut disappoints and spurs a selloff! In fact, I am surprised that the Fed cut at all knowing that 25 basis points is not going to help and that they risk loading a shaky inflation number.

With the sell off today, a few sideways days can be expected before the market continue its way down. Hey, hold on! "WAY DOWN"??? Yes! Today's selloff marked the end of the reaction rally that started on 27 Nov, which failed to break the high of the last reaction rally on 31 Nov! This transformed the "rally" so far into a bearish continuation setup, making a lower lower and lower high. With the 200MA support line at the doorstep, we would love to see it hold up and push the Dow back up. Fingers Crossed.


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THE BIG DAY!

Ok, here's my take for the Fed release today:

1. MOST LIKELY : No more than 25 basis point rate cut.
There are really little reason why the Fed should cut rates. A rate cut would only increase core inflation and deflate the already beaten dollar. Controlling inflation is still the number 1 concern of the Fed and nothing's going to change it. However, Uncle Ben has proven himself to be highly subject to market pressure and so, 25 basis points seem just right.

2. LEAST LIKELY : 75 basis point cut.
Don't even think about it.

3. MOST DANGEROUS : No cut.
It is the most dangerous and yet it is POSSIBLE! Like I said, there are really little reason why the Fed should cut right now.

4. MOST FAVORABLE : 50 basis point cut.
There remains a marginal possibility of a 50 basis point cut should Uncle Ben decide to make it a final cut. This could spur the Santa Claus rally everyone's wishing for.. (well, not everyone since a lot of investors are already shorting positions so far).

5. MOST RELIABLE : Trust in the US economy.
Its still the greatest story nevertold, its still got the kind of brains no one else in other economies have and its still the forerunner in all kinds of technological advancement and no matter what the Fed does, the US economy should still do well in the long run.

What's your take? :) Comment Now!

A Heavy Weight Week Ahead..

FUNDAMENTAL ANALYSIS
Yes, its going to be an extremely heavy weight week ahead with the rate decision on Tuesday and the Consumer Price Index on Friday (please see stock market calendar). The Job Report last Friday failed to move the market, indicative of the importance investors are putting on the rate decision instead. Nobody knows what the Feds will do yet except that 25 basis points had been priced in for a long time now. This means that if the Feds cut only 25 basis points, we could still see a significant pullback. Well, there really are very little incentive left for a rate cut with the real economy doing extremely well and inflation under good control. If the Fed does cut 25 basis, they risk inflating the economy and deflating the already weak currency. Let's not forget that the Fed's mandate is "Keep inflation under control" and "decrease unemployment". It appears that those mandates are met so far with the inflation numbers and the employment numbers... so, where's the motivation of a cut?

TECHNICAL ANALYSIS
The Dow continues to make a series of higher highs and higher lows so far on a weekly scale and it is obviously making a new leg up right now. It seems like, from a technical analysis point of view, that the Dow could continue to go up from here and make a new high. That new high could happen in Jan 2008 if this trend holds up.


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Strange Week So Far...

Job report came in inline with expectations indicating a steady growth in jobs but that didn't quite spark off any form of excitment in the market as this outcome has already been fully priced in over the past few days.

This is how the market works... the market is forward looking and prices in the possibility of an event before it happens and then if it happens inline with expectation, all is well and the market doesn't move very much; if beats expectation, the market rallies again to price in the new information; but if it fails to meet expectation, the market collaspes and takes back all that has been priced in so far. Simple logic but complex in its identification.

Obviously, it is the first scenario we are experiencing this time round. This might suggest that the possibility of a slightly more than 25 basis point Fed rate cut next Tuesday has also been fully priced in! So far, with all the actions being taken in the economy and all the rosy data, reasons for a strong 50 basis point cut (or even a 25 basis point cut??) is diminishing by the days. If the Fed cut by just 25 basis points, we could still see a pullback in the market as it loses momentum; 50 basis points could start a good short term leg up and no cut could mean back down to August lows... still dangerous times to be betting on the market.

Stubbornly Waiting...

I am not believing anything I see before I see the jobs report tomorrow at 0830am (see stock market calendar).

End Of The Bears?

FUNDAMENTAL ANALYSIS
The Dow put up an amazing fight against the bears today as ADP payroll report beat estimates along with the best productivity in 4 years! Rising productivity and rising private payroll! What else do you need to know to get convinced about the strength of the US economy??!! It certainly took the bears an amazingly long time to get on the side of the Bulls! Well, don't get too happy and over confident to the upside yet... remember, the big mover this week is this Friday's Job reports and the ADP payroll report have a pretty low historical correlation with the Job reports due to differences in the way data is collected. But the good thing is, there seem to be lesser reasons lately to be bearish. In fact, even with the low correlation between the ADP employment report and this Friday's Jobs Report (see stock market calendar), beating estimates by such a HUGE margin does point to a higher job report no matter what. In fact, 70% of the CEOs in USA is optimistic on the economy, which means that they are probably going to continue employing, which also points to a better job report this time round. Almost all the bearish points that I raised up over the past week has been negated by today but as a conservative investor, I would rather see what the Job report is like and what it's effects on the market is like for real instead of trying to read the tea leaves.

TECHNICAL ANALYSIS
Well, I must say that the Dow did a pretty encouraging bounce today. This is especially encouraging as the Dow bounced off the 200DMA which started the rally last August. In fact, the 200DMA held up for 2 consecutive days, making it a short term support level. Well, does this mean that this reaction rally has survived the pullback I mentioned yesterday and has resumed the bull trend? Well, I hate to say this but the pullback has been so shallow and on so low volume as to make it rather insignificant. By insignificant, I mean that the pullback may not have started yet! Today's rally look more like the resuming of the reaction rally rather than the end of a pullback! Does this mean that there is going to be a pullback soon? I would think so. In fact, I expect a significant pullback below the 200DMA before I declare the pullback over! The pattern just isn't adding up clearly. So, here's my take today... If the Dow follows up tomorrow, breaking the 30 Nov high of about 13466 significantly, I would say that the odds of a rally from here is very high. If the Dow ditch tomorrow or on Friday, then my pullback argument stands.


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The Critical Pullback Goes Underway...

Yes, today's drop in the Dow officially kicks start the pullback that I have been talking about for the past whole week. This pullback is so incredibly important because where it ends determines the near term direction of the Dow! Again, if it ends before the 12750 level and turns around, the Dow could resume its long term bull trend and make Santa Claus rally happen. If the Dow breaks below the 12750 level significantly, we can say goodbye to Santa Claus this year and hello to the first negative year since 2002 (yes, the first negative year since the grand 2000 to 2003 bear market!). On the bright side, participation in the pullback has been light so far as investors await the job reports this Friday (see Stock Market Calendar).

More Reasons To Be Bearish...

FUNDAMENTAL ANALYSIS
You guys must really hate me now... I can't help it but I am detecting more and more problems in the real economy and the stock market in the short run. It is becoming obvious that further rate cuts are not going to help the subprime mess as people are just not borrowing anymore, PLUS, credit agencies are reluctant to lend anymore. Houses are going into default simply because everyone's so maxed out their home equity loans and refinancing instruments for the purpose of other alternative investments (and probably lost them all by now) that there simply aren't any ways to get more credit to tide through the crisis! There's a good old chinese saying, "You don't tear the west wall to mend the east wall". That's exactly what credit consumers are doing right now and more rate cuts isn't going to help. That is exactly why regulators are beginning to admit that more must be done to help relief the impact of the subprime crisis beyond just cutting rates. In the short run, more rate cuts cannot translate fast enough into lower mortgage rates but will hasten inflation. After 75 basis points cuts, stock markets are lower than before those cuts in August! That tells that no matter how the Fed is going to cut, investors know that this is not the way to go anymore. But is the cut going to happen? YES! Because investors have forced the Fed's hands through the Fed Fund Futures! Again, the lousy thing continues to be this... a 25 or 50 basis point cut isn't going to help because it have already been priced in and a 100 basis point cut would only satisfy the speculators for a day or two before grim reality sets in again, bringing the market lower. My market poll on my Option Trader's HQ has moved from more votes on ending the year higher last month to ending the year moderately lower today. Until a really sensible plan of action to clear this mess up arises, investors are going to look like a huge bunch of rabbits scattering at the very first sight of danger. Today's trading is also light across the board as investors await the Job reports this Friday... fingers crossed.

TECHNICAL ANALYSIS
The critical pullback on the recent 4 day reaction rally has happened at last. The next 5 days will be critical. In accordance to the Dow Theory, if the pullback turns around before the 12750 level, we will have ourselves a possible staging area for a rally. However, if the pullback continues lower than 12750, this would signal a transition into the Big Move phase of the current bear trend... which means a lot more downside to come. In fact, by pulling back at this level, the Dow is also completing a dangerous head and shoulder formation, which also suggests more downside. All in all, the next 5 days is going to be critical and all technical indications are flashing warning signs... certainly not a good time to be either long or short but a straddle could be worth the bet.