Stock Market Analysis

Thursday, February 28, 2008

Market Drops As Probabilities Of Rate Cuts Rises...

Not so long ago, stocks drop everytime the possibility of rate cuts drop but this time round, its different. The Dow dropped 112.10 points today as a sour GDP number of only up 0.6% gives further support to Uncle Ben's promise of further rate cuts! Yes! Investors are actually WORRIED about further rate cuts! Why is that so? Because the rate cuts so far didn't seem to have done anything for the economy except to result in sky high commodity prices, rising inflation and a beat down dollar! In short, the rate cuts so far have injected nothing but negative things into the economy and further rate cuts are going to do nothing but push inflation over the roof, rocket gold and oil to record highs, jump gas prices at the pump, shove the dollar closer to becoming worthless pieces of paper and then still do NOTHING to solve the current housing and credit crisis. Solving money problems simply by making money cheaper and more worthless to own simply isn't the way to go. This is one crisis unlike any we have ever seen in history and I speculate that the full impact has yet to arrive. In fact, I think we should see a couple of high profile close downs before this is over. For now, with nothing solved in the economy, I would not believe in the possibility of a sustained rally. Of course, with the steepening of the Bond yield curve (see bond yield curve here), we could see a series of relieve rallies as money is forced back into the equity market due to low bond yields. This is time for investors to be nimble and probably explore other short term financial vehicles such as stock options.

The Dow truly disappointed me today as it failed once again at the 12750 resistance level. In fact, I never saw the Dow as having the strength to break that level as the volume over the past few days are nothing short of disappointing. Well, that being said, I would classify the recent market action as a flag fake out and that immediate support level may be around the 12250 level.

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Wednesday, February 27, 2008

The Big Promise...

Today's market action is really more technical than anything fundamental. Investors just need to take some profit after 3 good days in this crazy, volatile market condition. This is especially so in the face of a resistance level, which in this case is the 12750 level for the Dow and tomorrow's GDP numbers (see Economic Calendar). On the bright side, we are seeing short term treasury yields tanking like a rock, creating an extremely steep yield curve. Such a curve indicates that the flight to quality has really gone a little too far and soon, investing in bonds would be unattractive. Those money would have to find a more attractive investment vehicle, which in this case, would be equities. In fact, such a curve pattern usually spell that the bottom is near for equities.

On the down side, January durable goods order came in disappointing, further enforcing the notion of a weakening economy. Fed chairman Ben Bernanke seemed to get it at last with his promise of further rate cuts to shore up the economy. That's the Big Promise. I know he has a very difficult job there in the Fed but I cannot help but criticize his being behind the curve all the time. While the stock market seems to be a leading indicator of what is going to happen, Uncle Ben seems to be a lagging indicator instead. He failed to see a weakening economy late last year when the markets are already talking about it and failed to cut rates aggressively in order to prevent this episode that we are seeing today. Today, with the weakening of the dollar, rising commodity prices and rising inflation, which adds up to an extremely fragile condition where fed fund rate should be held steady for a while, he is promising more rate cuts. Really wonder what is going on. Well, that makes him the Fed chairman and me, a mere fund manager.

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Tuesday, February 26, 2008

Stocks Surge Ahead Of New Home Sales...

Stocks staged a followup today ahead of tomorrow's New Home Sales data (see economic calendar) with the Dow gaining 114.7 points, posting the BIGGEST 3 days rise since November! After Monday's existing home sales beat expectations, investors are looking ahead for tomorrow's New Home Sales to beat expectations as well, indicating that the housing market is coming to a bottom at last. In fact, this rally came even though the Producer Price Index was higher than expected! A little bit of exuberance? Maybe, but let's not forget that the stock market DOES NOT reflect current data! The stock market reflects FUTURE EXPECTATIONS and the expectation clearly is that the housing mess is coming to an end.

A follow up to yesterday's breakout but what's missing? V-O-L-U-M-E!!!! Clearly many investors are still on the sidelines and waiting.... waiting for what? Is there something most of us don't already know? Maybe. No matter what, the immediate short term resistance level is at 12750 which the Dow failed at during the last relieve rally in January. I still cannot give my 100% certain stamp of approval on this "rally"... its just not not showing all the indications needed.

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Monday, February 25, 2008

Feeble Breakout....

Stocks staged a feeble breakout today on better than expected existing home sales and continued speculations on the Ambac bailout as I have expected yesterday. The breakout took the Dow up 189.20 points, above the strong 30MA resistance level but on much lesser than impressive volume. In fact, many of the winners today were beaten back in after hours trading. This shows that investors are still not convinced that this is the point where the market turns around... neither am I. As long as analysts are still debating whether or not the US economy is already in a recession or that if an academically defined recession is around the corner, the market will not be ready for a full scale turn around. The rest of the week is expected to be volatile as more heavy weight economic data get released (see economic calendar). On the technical front, I would need to see a strong followup tomorrow on rising volume before I validate this breakout.

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Sunday, February 24, 2008

Beginning Of The End?

Is this the beginning of the end of the subprime crisis?

Rumors that a bailout plan for troubled bond insurer AMBAC (ABK) is on the way this week caused the market to rally late last Friday to close up positive from a deep negative territory. Investors see this move as the beginning of a series of bailouts for the financial sector, possibly ending the subprime crisis. Even though this bailout does inject some optimism, the slow down in the US economy and issues with rising inflation are issues which still remains unsolved. This means that earnings growth and outlook continue to be uncertain for most companies, which translates into uncertain outlook for stocks and the stock market. So, what I am saying is, don't expect this single bailout to translate into a sustainable rally.

On the technical front, the daily 30MA continue to be an extremely strong resistance level for the Dow. In fact, last Friday's strong late day surge stopped right below that line as well! We should see a definite break this week as tight sideways market like this rarely last for more than a month. But which direction would the break be? I would think that a break to upside is very likely even though it may not translate into a sustainable rally. A visit to the Jan lows appears to still be in the horizon no matter what the market does this week. The going continues to be tough but the tough gets going. Let's hang on!

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Thursday, February 21, 2008


The case for STAGFLATION, which I have been talking about for months, recieved all the facts it needed today. Philly Fed Survey turned in terrible along with leading indicators, suggesting that the economy continues to do badly and is expected to continue to be lousy. This, along with yesterday's high inflation numbers, suggests slow growth or zero growth along with rising inflation = STAGFLATION! Investors woke up to this fact after the Philly Fed Survey numbers are released and brought down the market which looked rather strong on the open. I am more and more inclined to believe that this is going to last for a while...

The Dow looked like its going to break the 30MA to upside upon opening but ended way down suggesting that the 30MA resistance is still too strong to be broken. I think a visit to the Jan lows continue to be inevitable.

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Wednesday, February 20, 2008

Stopped By The Almighty 30MA Again...

The market staged an impressive mid-day come back for apparently no fundamental reasons at all. Crude oil remains high, flight to gold continues, headline inflation is way higher than the Fed's expectations... nothing fundamental supports this turnaround at all. In fact, the bearish sentiment during the morning session should have been carried on throughout the day. Clearly, some institutions are beginning to accumulate stocks at these levels. On the economic front, the ugly head of STAGFLATION is becoming more and more real as inflation and slow growth becomes an increasing concern. More rate cuts? I don't think more rate cuts is the way to go anymore as that would only serve to deflate the dollar further, causing higher inflation. What's the point of having more money when your money is fast becoming worthless, right?

Once again the advance of the Dow is stopped by the almighty 30MA resistance level! In fact, the 30MA have stopped the advance of the Dow ever since the great January decline ended! The 30MA line ended the relieve rally on 4 Feb and now threatens to once again beat down the Dow. Interestingly, the Dow doesn't look like its going to give up without a fight this time round and if it should break above the 30MA line on higher volume tomorrow, we could see a nice leg up! Yes, because everyone's thinking that a test of the Jan lows is compulsory before a rebound, that could well be the very reason that stops it from happening at all as investors accumulate before the rebound begins. On the chart pattern basis, the Dow is forming a bearish pennant pattern which signifies a great deal of upside resistance and more room to downside. It is going to be interesting to watch how it unwinds.

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Tuesday, February 19, 2008

Crude Crude CRUDE REALITY....

What started as an extremely strong day in the market ended up in complete disaster as the bulls totally gave up the gains for the day in one glorious retreat when crude oil hits $100 per barrel. Crude oil has been flirting with the $100 mark many times over the past few months but never have it closed up above $100 like it did today amidst threats from OPEC to cut production. Looks like OPEC wants oil above $100 in order to maximize the returns on their last drips of oil. So, how does $100 oil make such a huge impact on the stock market? High oil prices = higher production prices = higher retail prices = higher inflation = higher price at the pumps = lower consumer spending = NO RATE CUT! That conclusion is what investors are worried about! The rate cuts so far has deflated the dollar too much, in fact, so much that it has started to import inflation. Importing inflation means that imported goods are becoming more expensive due to the lower value of the dollar. The fact that the market has held on to gains very nicely until crude oil breaks the $100 mark around 3pm ET, after which the market literally jumped off a cliff, indicated the amount of fear surrounding the $100 level. In fact, this inflation fear also showed up in commodities as investors flee to gold, pushing the price of gold upwards. If tomorrow's CPI numbers (see economic calendar) come in higher than expected, that would totally break the market as hopes of further rate cuts diminishes as inflation fears take central stage once again.

More weakness today as the Dow failed to break the 30MA resistance level significantly for a 4th straight trading day. Nothing in the indicators are stopping the Dow from visiting the Jan lows before deciding where it wants to go. I maintain my prior outlook.

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Back At Last...

Took a pretty long weekend break myself this Presidents' Day weekend and I hope you guys enjoyed yourselves as well.

Coming back to the market this week, I see the heavyweight CPI number coming up on Wednesday (see economic calendar), which is something that will definitely affect the Fed's decision whether to cut rates again or not. The CPI numbers are expected to be higher due to the rate cuts so far, so the question really is whether the Fed finds it acceptable or not. On the technical front, a visit to the January lows still look strong in the cards. Let's see how the week unwinds.

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Wednesday, February 13, 2008

Retail Sales Injects Optimism....

Yes, more reasons to be optimistic as Retail Sales beat every single estimate down wallstreet (and mine!)! Instead of turning up negative as expected, retail sales numbers ended up positive instead, refuting the outlook that consumerism is shrinking. Certainly the stimulus package that was signed today could have helped as well. Continuous good news is what every rally need and so far this week, it has really been that way. My only concern is a technical one. The rally so far over these 3 days have occurred with declining volume, indicating a gradual loss of interest in this rally and is definitely not a good sign this early in the rally. Apparently, there is still a lot of hesitation and uncertainty in the market and when we look at the whole picture carefully, nothing that started this bear market have been resolved or looks like getting resolved at all. I would maintain that this is another relieve rally and that it might still go down pretty soon and test the Jan lows.

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Tuesday, February 12, 2008

Great Earnings Injects Optimism...

The Dow staged a surprising 133.4 points rally amidst expectation that it should revisit the Jan lows before doing so. I was one of those analyst with such an expectation. Apparently, the expectation of a rally after visiting the Jan lows has investors rushing in now along with the great earnings so far in order to be ahead of the move. Such a rush have the effect of preventing the visitation of the Jan lows from happening in the first place! :) The earnings season so far has been great and most of these great earnings are from exports due to the weak dollar. Nonetheless, nothing drives stock prices more than earnings and earnings expectations. However, I would not be surprised if the market takes all these back a little tomorrow when the retail sales numbers bring some investors back to reality (see economic calendar) and the reality is.. slowing growth and consumerism. A lot of analysts are attributing the rally today to Berkshire's proposed take over of the muni bond insurance from the troubled insurers like MBIA. However, just think about this... this is a scheme doomed to fail because the muni bond insurance business is an extremely significant, non-subprme related business these insurers have and probably their ticket to long term survival! Would they give it up so easily? I don't think so. Already there have been 1 official reject out of the 3 insurers approached by Buffett. Mr Buffett, it's not always a buffet out there where you can just eat to your heart's content you know?

The Dow made a significant but weak break out of the 4 days limbo. The internals to this rally is somewhat weak with advancers marginally leading decliners. Volume is also way below average and the intraday retreat from its 30 days moving average proves that the 30MA continues to be a strong resistance level, capable of turning the Dow down like we saw back on 4 Feb. I maintain my view that the Dow might still visit the Jan lows before deciding where to go. Absent such a move, any rally could still be a short lived one.

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Monday, February 11, 2008

Slow Slow Rat...

Strangely, the Dow has been moving sideways so far since the lunar year of the rat began. There was a small sign of bullishness in the market with advancers leading decliners by a small tad today but nothing that change the fact that the Dow made another sideways day. There was no big release today nor is there any major releases the rest of the week. Uncle Ben's testimony at the hill this Thursday is not likely to move anything as he is really getting more and more tactful with his words lately... so much for being transparent. I maintain my view of a visit of the Jan lows.


Sunday, February 10, 2008

Year Of The Rat Begins...

This is the first full trading week of the lunar year of the rat. The Rat in chinese mythology is an extremely clever and kind creature which often gets overlooked but produces stunning results. This is also why it is the very first creature in the chinese zodiac. The stock market was brutally beaten, especially in that final week of the lunar year of the pig (yeah, and you are wondering why the market was so sluggish whole year). Will we see new signs of life starting this week with the rat on our side?

The Dow took back all the gains of the previous week (which was also the only significant up week since 2008 began) in one fell sweep last week as I have expected. With an extremely quiet week ahead (see economic calendar), I don't see anything that will stop the Dow from visiting and testing the January lows as anticipated. Could the Dow form a double bottom from which a rally could shape up? With plenty of ammunition in both the bull camp and bear camp, it is anybody's guess. The only important thing technical traders need to take note is a possible support at the Jan lows and not get carried away with the shorts. Most analyst take the lowest CLOSE as the Jan low (Jan low 1 in the pic), but prudent technical traders should take the lowest LOW as the Jan low instead (Jan low 2 in the pic). Remember, technical analysis is all about 2 principles: "Prudence" and "Significance".

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Wednesday, February 06, 2008

At Last Someone Agrees....

Market sold off today once again as Fed official Charles Plosser confirmed my Stagflation outlook on the economy and suggested that Fed fund rates should not be cut further. If you hit the "stagflation" tag beneathe this post, you can read my previous take on stagflation. In short, stagflation is a complex economic condition where growth is slowing to a still while inflation continues to rise. Indeed, headline inflation numbers have been rising throughout the year! More rate cuts would only mean more inflation while not attacking the problem of credit default at its heart! Furthermore, it does nothing to help the stock markets either! After 125 points rate cut over the past 2 weeks, the stock market's back where it started before the rate cuts! What we need in this economy is a good series of both corporate and individual tax break in order to improve growth and solve the credit default right at its heart! Hey, how about getting rid of the capital gains tax? Well, not only is stagflation a problem, getting a stimulus package out there is a problem as well. With the Senate stimulus package disapproved being 1 vote short, investors are beginning to see how hard it is for any stimulus package to hit the streets with the senate that we now have, adding further pressure to the already dismal sentiments in the market. All in all, those things that actually started this relieve rally are now shaky and investors reacted predictably by taking those votes back from the market. Fundamental outlook continue to be shaky in the US economy as too many plans have been proposed with no real solution and nothing that really addresses every single aspect of this complex economic condition. I still do not see a full scale bullish reversal in the near future.

The Dow followed up on its 370 points ditch with another 65 points drop today. This has kept my technical outlook on the Dow the same as I proposed yesterday... a test of the January lows, failing which, this bear market will be going lower.

Markets like this makes learning how to profit from both up and down markets through stock options essential for every savvy investor.

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Tuesday, February 05, 2008

370 Points BEAT DOWN!

What everyone thought was a plunge due to weak ISM services numbers is really just full scale profit taking on technical weakness. ISM services was never a market moving economic indicator at all. This is further confirmed by a flight back to bonds as bond yields drop across the spectrum slightly. Clearly, I am not the only analyst or trader in the world who saw the 12750 level as a strong resistance level which failed to break on 4 Feb. The failure to break that resistance level is enough reason for traders to take profits off the table, ending the relieve rally. What does this mean for the near future? Certainly a test of the Jan lows and probably more lows. A good time for some well positioned put options.

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Monday, February 04, 2008

Investors Take It Off The Table

After being beaten down since the year begun, investors took the opportunity to take some money and profit off the table as strength in this relieve rally wanes. This is the kind of herding behavior and generally equal tolerance for pain that creates resistance levels. All these happened as the Dow come up against a strong daily 30MA resistance. There wasn't really any real negative drivers today and internals still look healthy with advancers almost on par with decliners, suggesting that today's actions are purely technical (oil and bonds didn't change much either). That being said, if the Dow fails to break above 12750 decisively within the next few days, it could spell the end of this "dragon tail formation push" relieve rally. The end of a rally this early could spell the continuation of the bear trend and a retest of the January lows.

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Friday, February 01, 2008

2008's Coming Back!

It certainly didn't take an economist or analyst to know that the market has taken the economic releases of the week well and brought the market into the biggest positive week of 2008! In fact, the market's almost halfway back up the new year ditch so far and this is also the strongest weekly gain in the S&P in 5 years. It is amazing how good news comes in a series. First is the stimulus package, then the rate cuts (and yes more to come) and today, a major M&A in the tech sector! Microsoft's bid for Yahoo has created huge, renewed, waves of bullishness and excitment throughout the market. M&A's been pretty quiet so far and the fact that its coming back to life suggests that the market may be headed for a turn around. In fact, the disappointing jobs report did nothing to beat the bulls! The Financial and Real Estate sectors, which have been trashed and beaten up so far, are coming back to life as expected. The Dogs of 2007 are indeed going to be the stars of 2008 and that may be happening right now.

On the technical front, the Dow formed a huge morning star formation in an oversold region on the weekly charts, signifying the possibility of a couple of good weeks ahead. Immediate resistance band may be around the 13000 to 1350 region. Certainly a great time for some risk limited call options.

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