Doubt Dominates...

Stocks took a setback as the Dow drops 194.65 points on dubious CPI numbers and bad news stemming from Bear Stearns.

CPI and headline inflation turned in flat for February, beating all analyst's expectations. Certainly I was shocked and immediately had doubts as to its authenticity. That was supposed to be great news for the market but investors are just too smart for that. A look into the details showed energy prices to have fallen in February! A look at your pump prices as well as the sky high commodity prices and you will find that energy prices could never have fallen in February! One dubious number is enough to cast doubt on the entire report.

Compounding the problem of a dubious CPI number is the urgent bailout of Bear Stearns by the Fed ahead of the new plan to release liquidity into investment banks. This brought investors back to the reality that the subprime mess is far from over.

Well, the market is simply not buying into whatever good news there was last week, putting serious doubts on the speculation that this might be the start of a rally. What's worse is the fact that if the low of January is breached, the market could laspe into a full scale bear market, the kind we saw back in 2002. This is what I call the Last Line Of Defense.


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No Rate Cuts....

FUNDAMENTAL ANALYSIS
You know what? Core CPI numbers came in inline with expectations at 0.2% while headline rate came in 0.3% and hey, no news from Uncle Ben! What does this mean? Even though the inflation number is inline with expectations, analysts expectations is clearly not what the Fed is expecting to justify an early cut! We all know by now that if inflation numbers turn in favorable that the Fed will throw in a rate cut almost immediately following the release but hey, NOTHING! That threw the market into a complete disarray that ended the day right about where it begun. Does that mean that the Fed is not going to cut rates afterall? MAYBE! If there is any intention to cut rates under the present pressure on the dollar and surge in gold and inflation number, Uncle Ben would have cut... TODAY! Well, the next big thing would be what Uncle Ben says in congress Tomorrow. BUT, IMO there is too much talk! Its time for some action! Price multiples have been severely depressed with the multiples compression so far and it does look ridiculous to see multiples compressed further across the board. If the Fed does please the market, we could see a really huge rebound. That's a really BIG "if". So, what exactly is "Multiple Compression"? This is a term coined up by popular finance describing a situation where Price Earning Ratios of stocks are took down across the board in a broad bear market.

TECHNICAL ANALYSIS
Huge doji formed today in the Dow with after market futures pointing upwards. All indications suggests that the relief rally or more technically known as a reaction rally is going to happen over the next few days... nothing to cheer about as all technical patterns and indications are starkly bearish. In fact, patterns formed over the past year looks like how it looked just before the 2001 crash! Well, I continue to be wary and continue to balance call options with put options in order to react quickly to any degradation.

Tomorrow's The Big Day...

Today's drop may look scary but, in case you have not noticed it yet, it merely took the market down to the 9 Jan low, back down to where the market started going sideways. Where it is really going to go really depends on 2 things:

1. CPI numbers turned in lower than expected like the PPI did today.

2. The Fed throw in a rate cut immediately following the favorable CPI number.

I am against a rate cut for the sake of saving the market but I think that's what the Fed is going to do anyways if CPI numbers convince him that inflation is not yet a serious problem. (Yes, he's just kidding himself... the inflation situation is clearly very bad right now evident in the flight to gold.)

All Cards Hidden Till CPI Numbers...

The CPI numbers coming this Wednesday is the most important that I have ever waited for. In fact, any market action prior to the CPI numbers are merely misleading moves. Why is that so? That is because Uncle Ben could cut rates the moment the CPI numbers are released! YES! Uncle Ben wanted to do something during the last Fed speech but he held back because he wanted to see how inflation is behaving before taking the shot! If the CPI numbers turns in lower as expected, Uncle Ben could drop the case for inflation and just cut fed fund rates 25 basis points and the discount window by another 50 basis points! However, if the CPI numbers turns in HIGHER, I can assure you that the market is going to be very very disappointed as it will not only kill any possibility of a rate cut right after the CPI numbers but also during the meeting end of the month. Gold is making a rush along with the continued downwards shift in the bond yield curve. All these goes to show a general concensus that inflation is indeed a concern and a flight to wealth protection is underway. So, all cards are in the hands of the CPI numbers and any speculation before the release are just that, Speculations.

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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Bullish Inclined Mixed Day...

FUNDAMENTAL ANALYSIS
What a mixed day today as the Dow ended down marginally by 20.40 while the Nasdaq composite gained by a significant 28.74 points. There are certainly tons of reasons for this mixed action both on the fundamental and technical front, however, why did I say that today is a "Bullish Inclined" mixed day? Well, that's because there are plenty of good news to look forward to versus the "Bad news" so far. The "bad news" is, Consumer Price Index rose 0.3%, the biggest increase since May. This is compounded by the fact that real weekly earnings have gained only 1.3%, lower than the current inflation rate suggested by the core-CPI index of 2.1%. Such an increase certainly reduces the possibility of another rate cut at the end of the month (well, we all know that it is probably not going to happen by now, don't we?) Well, the good news is, as I have mentioned, that the core-CPI has risen only 2.1% over the past year, which is within the Fed's "comfort zone" of keeping inflation within 2.5% (analysts estimates... unofficial). Another good news is that despite this earnings season being widely speculated to be a disappointing one, companies continued to report better than estimated earnings generally (other than a couple of disappointments). If good news continues to roll in from the earnings front, the market could recieve a short term boost. Well, to conclude for today, even though the housing front still looks terrible and Uncle Ben's speculating a slow down in the economy over the next few quarters, there are still plenty of good news and good company performance to keep investors happy for now.

TECHNICAL ANALYSIS
Similarly, the technical front also supports the view of a bullish inclined mixed day. The Dow went all the way down to its critical short term support line, the 30DMA, and then bounced right off to end up significantly higher, forming a huge spinning top formation along with a volume surge. This formation, following a few consecutive drops, signals a possible selling climax (possible because selling climaxes usually takes place after a much more significant pullback). A selling climax suggests that all remaining sellers have jumped in and it is time for the buyers to take over for a bargain. Of significance is also the fact that the Dow has also entered the short term oversold region, giving it all the more reason to be able to stage another run from this point. Our internal screening also turned up significantly more bullish reversal signals than bearish signals across the universe of stocks, increasing the possibility that the market might be staging something. From these indication, I would certainly be preparing my account for the up side. :)


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And So It Begins...

The Dow made a significant drop today by 71.86 points. What made this drop significant is the fact that it is the second consecutive drop on rising volume. In fact, it is rather clear now that the market has begun a pricing in of the possibility of not getting a rate cut, beginning 10 Oct. A lot of analysts attributed the action these 2 days to rising oil prices. Yes, rising oil prices is a concern but, recently, not a concern big enough to move markets. In fact, the market has been rising along with oil prices since this rally begun in August. Tomorrow's CPI numbers is going to be a major market mover. CPI is expected to be lower this time as all other inflation indicators continue to turn up tame. Response to the number is likely to be textbook, but with limited real gains or losses reflected in the market eventually.

What's your take on tomorrow's CPI numbers? Please comment on your thoughts. :)