Final Capitulation Resumes...

No surprises today as the Dow turned down, resuming its bear trend as expected. Investors were hit with the worst ISM index reading since 1981 today, pointing towards continued economic contraction in the months ahead. So, what exactly is this ISM index and what makes it such a closely watched economic indicator?

ISM stands for Institute for Supply Management. It is an Arizona based group representing purchase managers around the country. It conducts 2 main surveys; the Manufactoring Survey and the Non-manufactoring Business survey. The former is what we refer to as the ISM Index and the latter, the ISM Services Index. What they do is really very simple. They survey purchasing managers in the manufactoring sector monthly in order to arrive at the ISM index. How is it that the opinions of these purchasing managers is such an important economic indicator? The logic is extremely simple as well. When the economy picks up, manufactoring activities pick up and in order for manufactoring to pick up, purchasing managers need to purchase factors of production! :) In fact, the index is important for 2 main reasons. Firstly, it is the first economic number released every single month. This gives investors the first look at what to expect in the numbers for the month ahead. Secondly, the ISM index has produced an amazing correlation with real GDP! In fact, a reading of 50 has been shown to correlate with a real GDP growth of about 2.5% with an additional 0.3% growth every point above 50. In fact, the Feds also watch this number in order to eventually arrive at a rate decision.

So, the Dow is going to go down lower throughout the week, no doubt about that. This is definitely going to be a negative week with support at around 7200. That is when it will start to get tricky. This Friday's Job report (see economic calendar) could get tricky as well. It is definitely going to be a multi-year high unemployment number again but how will investors construe it? Will it be construed as the peak unemployment that everyone's been waiting for, spurring a reversal? Seriously, odds are good if the 7200 support level holds.

ISM Beats Oil...

FUNDAMENTAL ANALYSIS
The ISM manufacturing index beat expectations today as it turned in at 50.2% for June, indicating an expanding manufacturing sector, versus 49.6% in May. This number beat analyst's estimates of 48.5% hands down, closing the Dow marginally higher by 32.25 points despite oil making yet another new high. Yes, the great ISM number beat oil to it today but just barely. The pessimism and the bear mood in the stock market is so entrenched that it takes a lot more than just one great number to turn things around. How about another great number this Thursday? The All Important Jobs Report? (see economic calendar) Well, a series of good numbers in this holiday shortened week might just rebound the Dow a little but with the market already in bear mood, I see nothing more than just a dead cat bounce. As long as oil remains a problem, any rebound in the stock market cannot be expected to result in a sustainable, long term bull trend. For now, investors pessimism are also reflected in the falling bond yields across the yield curve (see bond yield curve here) as large institutions rebalance their portfolios for more safety.

TECHNICAL ANALYSIS
The Dow formed a hammer candlestick signal today and such a signal occuring after a significant retreat indicates that the bulls are beginning to beat the bears at last and that things might turn around soon. A hammer candlestick signal is formed when the bulls close the day slightly higher than the opening after the bears take it a lot lower intraday. It is a candlestick shaped like a hammer with a small head and a long handle, hence the symbolic name. The longer the handle, the stronger the signal (and yes, today's hammer doesn't have an impressively long handle, so don't bet on it performing 100%). Indeed, the Dow is long overdue a dead cat bounce and this might be where it rebounds a little amidst all the positive economic data before the bears take things lower again. Intermediate bear trend is still strong and any rebound within such a framework can only be construed as a short term relief rally, don't be fooled. If the Dow rebounds, immediate resistance would be on the March low of around 11750 with a bear trend resistance at around 12000.


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Bears Strike Back!

FUNDAMENTAL ANALYSIS
ISM index showed a consistant advance coming in at 49.6 versus 48.6 in the previous month, suggesting that the worst is over and the economy is on the way to recovery. Crude oil also came under huge pressure as investigation commence against hedge funds manipulating crude oil prices. So why is the Dow still down 134.5 points? There seemed no clear explanation today except for the fact that investors do need to take some profit off the table after the Dow staged such a significant retreat at the top of a good 3 months rise. The next big thing this week will be this Friday's Jobs Report (see economic calendar). Again, the Job report is expected to support the economic recovery story.

TECHNICAL ANALYSIS
The Dow is right back onto its 12500 support level once again to the disappointment of many traders. 2 roads lead on from here... 1, Rebounds tomorrow and resumes uptrend. 2, Breaks support level and head for new lows. There are still considerable and measurable strength in the internals so the odds are still slightly in favor of the bulls. However, if you are still long stocks, it is time to at least consider hedging your position.

Banging The 13000 Wall...

FUNDAMENTAL ANALYSIS
The bears could certainly hear the loud thumps on the other side of the 13000 wall as the bulls attempted to break it down today. The Dow gained 189.87 points today as optimism returned on optimistic jobless claims number and an ISM index reading that turned in at the same level as March despite falling short of estimates (48.6). The fact that the ISM index turned in at the same level as March kept the ISM recovery story intact, which is of course a bullish sign. The ADP report as well as the jobless claims report so far continue to point towards a recovering job market, which of course is adding to the speculation on positive numbers in tomorrow's Job Report (see economic calendar). Speculation surrounding an optimistic Job Report may also be what drove the market higher today. Adding to the optimism is the big follow-up in the decline in oil price today! Yes! Like I said yesterday, crude oil price needs to follow up to downside today in order to form a significant turnaround and it happened just as we hoped. Crude oil price is the final hurdle standing in the way of a full scale rally (how many times do I have to repeat this?) and if it continues its way lower, below the $100 mark, the market could truly go into a sustainable rally. Let's look forward to great Job numbers tomorrow and see if it sparks a rally next week.

TECHNICAL ANALYSIS
The Dow made for the 13000 resistance level today and ended just slightly higher at 13010. 10 points above a resistance level does not signify a breakout. With the Dow still in overbought condition, I would not be surprised if the Dow retreats a little before making for the 13000 resistance level again for a significant breakout. That said, on a slightly longer time horizon, the 13000 level is not much of a level that will stop the bulls. In fact, we could see new highs this year despite widespread pessimism. The Dow is extremely used to trading in overbought conditions when a bull trend is in place. Is this it? Is this the bull trend that is going to keep the Dow overbought for a while more? As a technical trader, I would rather go with the trend then against it.

Hear The Bulls ROAR!

FUNDAMENTAL ANALYSIS
As I have expected yesterday, the Dow exploded upwards by 391.47 points on better than expected ISM number!

As I mentioned yesterday, we wanted oil and gold to break short term support and for the ISM index to turn in better than expected and HAAAAALLLLLEEEEELLLLLUUUUJAH! We got both of them today.

Have you ever seen footages of volcano eruptions on TV? If you have, you would have seen those thick smoke and occassional magma spewing just before the grand eruption occurs. I think we are seeing the smoke and magma coming out of the stock market now and that the bulls may just erupt without warning, at least right up to the Jobs report this Friday. Oil and gold continues to get beaten down today, further reinforcing my last straw scenario (see my posts over the past few days). In my post last Thursday, I have already warned oil and gold traders against speculating for new highs and yes, since that post, both commodities have gone south.

Seriously, what surprised me was the readiness and the bullishness in the market even before the ISM numbers were released today! With or without the number, the market was rearing to go! The bulls are raging! This is situation is somewhat unseen of, at least in my professional life as a hedge fund manager.

The ISM index, or rightfully known as the Institute of Supply Management Manufacturing Index is an index measuring manufacturing activity in the US with readings above 50 indicating an expanding economy and readings below 50 indicating a contracting economy. So, what makes the 48.6 today a bullish number? It is a bullish number because the index was at 48.3 in February! The index gained 0.3 points this time round for the month of March, which again reinforced the fact that we have narrowly missed an academic recession and is going into the recovery phase!

So, let's take stock of all the reasons why the bulls are going to erupt so far:

1. Recovering ISM index
2. Oil and Gold getting beaten like dogs
3. Consumer Sentiment index collasped (its always grimmest before dawn)
4. Fed bailout of BSC is demostration of their resolve not to allow the financial system to sink.
5. Existing home sales rising suggests possible start of the bottom in housing market.
6. Extremely steep bond yield curve suggests that smart money needs to move back into value stocks soon. (which is already rising as money moved back to equities from bonds)
7. GDP has not gone negative despite widespread speculation on an academic recession.

As I mentioned the first time I raised the eruption theory back on 23 March, the force of an eruption is proportional to its pent up period and yes, stocks have been pent up long enough and the eruption could take the bears by surprise. Those of you who took a toe dip using stock options like I have recommended over the past week, would have made some safe risk-limited profits. Hang in there and keep the faith!

TECHNICAL ANALYSIS
The Dow rallied 391.47 points, not on a volume surge but on a sensible rising volume! That made a world of difference! In fact, we had 3 single day rallies of over 300 points this month so far (including today's) and every of those makes higher highs and lows, which again, is extremely bullish. That proves that the bulls are increasingly optimistic while more investors from the bear camp re-examine the situation. Like I mentioned yesterday, a break upwards today would spell a visit to the 12750 resistance level. That was an extremely strong resistance level that brought down 2 previous relief rallies on 4 Feb and 28 Feb. What I would like to see is a strong follow up tomorrow which takes the Dow straight above the 12750 line like it doesn't exist. After that, we should see a slight pullback down and then a new bull trend starts. :) I am at my most optimistic since this crisis started so let's start the ball rolling!


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Economy Continues To Contract...

FUNDAMENTAL ANALYSIS
Stocks came under heavy fire today as the ISM manufacturing index turned in far weaker in Feb versus Jan and under the 50 mark once again. The ISM manufacturing index or Institute for Supply Management manufacturing index, is one of the most closely watched economic indicator for its significant history, timeliness and authority. In fact, the ISM index is the first piece of economic indicator to hit the tape every month. It is a survey on purchasing managers in the manufacturing sector across the country to arrive at an indication of how the manufacturing sector is doing. There are many ways to read this index and the simplest is that if the index is above 50, the manufacturing sector and hence GDP is growing and a reading below 50 indicates a contracting manufacturing sector and hence a contracting GDP. Today's ISM number for Feb turned in 48.3, down from 50.7 in Jan and you won't need me to tell you what that means, do you? Contracting ISM index is always bad for stocks and the dollar. It is bad for stocks as investors sell into the gloomy outlook and bad for the dollar as foreign trade partners sell the greenback into the economic weakness. Such weakness continued to fuel the bubble in the commodities sector, especially Gold and Silver, which are special commodities used for wealth protection. However, why did stocks stage a late day rally? Well, the reason is simple... investors already know that the economy is teetering on recession and that much of it has already been priced in. In fact, like I mentioned yesterday, many institutions are actually buying into bad news and selling into good news and today's market action proved that point. Well, the next heavy weight release would be the Job Report on Friday (see economic calendar). Job Report is the grandfather of all economic indicators and always put pressure on the market if it disappoints.

TECHNICAL ANALYSIS
Another sideways day today, marking a full month of sideways movement in the Dow. Great news is, sideways movements rarely last for more than a month and I think we should see a break out pretty soon BUT not without first visiting the Jan lows. Yes, I still stand by my visitation of Jan Lows view.

2008 At Last!

Its nice to be back at last after such a long break. :)

The Dow did a disappointing and dangerous looking dip over the past few days but I am going to deem it an unreliable indication of where the market is going to go because much of those profit taking is due to end of year closing of positions and fund drawouts on very low volume. Today's big mover is definitely going to be the ISM index at 10:00 eastern (see stock market calendar). The ISM index, or Institute for Supply Management Manufacturing Index. This the first BIG economic indicator every month and is definitely the most important indicator released by the private sector. This index measures the health of the manufacturing sector and indirectly, the health of the economy. The ISM index is also known as the PMI or Purchasing Manager's Index. A higher PMI is bullish for the stock markets now in diminishing recessionary fears. This also mean that any market action before 10:00am today is largely unreliable.

On the technical front, the Dow continues to ride atop its 50WMA on the weekly charts, waiting for a breakout. With the long term bull trend strongly intact, it could be expected that a breakout to upside will happen especially with folks investing their remaining December bonuses.

Another Sluggish Day...

FUNDAMENTAL ANALYSIS
What was shaping up to be a terrible day at the markets, ended up with the Dow down only 51.70 points, which is a lot better than suggested by the extremely weak opening that brought the Dow down by 100 points within the first 3 mins. Dow futures was pointing sharply down this morning with all the horrific news piping in from the Financial sector and in particular, from Citigroup and Merrill Lynch. It seems like the real, tangible effects of the subprime crunch has just begun to show its ugly head and to really take people down from high places at last. Investors are indeed beginning to wonder... "Who's Next"? The ISM business index released today, which was not a major economic indicator, turned up better than expected, beating estimates at 55.8%, lifting the Dow off its lows for the day. This release is just about the only trace of optimism investors could hold on to today, preventing the Dow from going even lower. It is hard to see where any more optimism can come from with the rally in oil and gold along with the continued weakening in the dollar. The economic numbers have turned in great so far but the outlook going forward, at least for the next 12 months, remains largely uncertain.

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TECHNICAL ANALYSIS
Well, even though it was a volatile day today, it's still to be classified as a sideways day as trading range is largely contained within yesterday's trading range with an insignificantly lower closing. It is extremely hard to tell if the market has found a bottom here or not. Looking back on 13 August, we saw the same market action where 2 days of sideways trading after a huge dip led to more downside. Even though the long term bull trend remains intact, short term outlook continues to be extremely uncertain on the technical front and on days like this, I always prefer to sit on the sidelines.

Not So Rosy Afterall...

Today was a photocopy playback of what happened back in 9 Aug as the Dow was tackled down for 362.14 points after entering the 30 DMA resistance band that I mentioned yesterday. It is incredible and scary to see how the market action is almost exactly the same as what happened back in August even though market fundamentals then were very different from what it is today. Will we see the market going lower over the next few days like it did back in August before a rebound? What's your take?

Today's message was a cautious one pointing to controlled inflation and growing jobs in a contracting manufacturing sector. The core-PCE is one of the heavy weight inflation indicators that Uncle Ben and his crew watch very closely and having it turn in 1.8% year over year certainly continues to keep interest rate hikes as a distant possibility. The real concern here is the ISM index moving lower for a 4th straight month to near contractionary levels of 50.9 (where a reading below 50 indicates a contracting manufacturing sector). This, coupled with the Chicago PMI dipping below 50, seems to indicate more bad times going forward.

On the earnings front, the effects of the sub-prime meltdown are starting to show up on the balance sheets of the big banks at last. We saw Merrill Lynch sacking their CEO 2 days ago and today, huge losses on the sub-prime front are showing up on Citigroup's balance sheets too. In fact, many asian banks exposed heavily in CDOs are hit pretty hard too. In fact, I think we would see many more of such losses turning up across the Financial sector in the coming earnings seasons.

Tomorrow's job report would definitely move the market in a big way with investors looking for something to believe in. Will the proverbial shoe drop tomorrow with the all important job report?

Another Healthy Retreat...

FUNDAMENTAL ANALYSIS
The Dow retreated yet another 79.25 points today as the ISM services index turned in the lowest level since March. The ISM services index is the second monthly index released by the Institute for Supply Management and is the cousin of the more influential ISM manufacturing index. ISM services is released on the 3rd business day of every month and measures the health of the service sector. Similar to the ISM manufacturing index, a reading above 50 suggests a growing service industry and a reading below 50 suggests a contracting service industry. The ISM service index is not a very influential economic indicator due to its relatively short history. There is simply too little data to arrive at a significant emphirical correlation between the index and prevailing GDP performance. That is why I would attribute today's market action more to profit taking than on the ISM services performance as a declining ISM services index should enforce the probability of another rate cut this month, thereby spurring some optimism instead. In fact, contrary to many of the news wires out there saying that today's pullback is due to poor economic data, the market ditched before the ISM services was released and then actually ROSE after the ISM services index was released! This suggests that there was already heavy profit taking prevalent in the market today and the ISM services index actually ENCOURAGED some buying (due to the higher possbility of a rate cut)! (so much for new wires)

TECHNICAL ANALYSIS
The Dow continues a healthy retreat today even though it dipped below the 14000 level once again. The Dow needs to get out of its short term overbought position for a sustainable bull trend to develop. In this sense, 2 days of pullback still didn't do the job. The Dow continues to be short term overbought and more sideways action should digest more of it. I would, however, be placing emphasis on the 1 Oct low. The Dow should not dip below the 1 Oct low in its efforts to digest the current short term overbought sentiment, otherwise, the short term bull pattern will be broken and the 14000 level would once again become a resistance level. Strangely, the markets has been more cautious and wary more than bullish since the fed rate cut. So far, only investors who took a risky speculative position before the rate cut would have benefitted significantly. Even on the weekly charts, it does seem like the Dow is almost due for a pullback to the weekly 30MA before it could muster enough energy to go further.


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14000 BEATEN!!!!!!

FUNDAMENTAL ANALYSIS
The market is always full of surprises and just when I thought the 14000 points resistance level is going to pose a bit of a problem, the Dow beat it in one swift stroke today, closing 191.92 points high at 14087.55! Obviously, the pricing in of another quarter point or half point rate cut has begun right now with the ISM index reporting in the lowest since March, marking a 3rd consecutive decline. The weak ISM data increases the possibility of another rate cut this month, encouraging the pricing in that we saw today.

The ISM index or the Institute for Supply Management manufacturing index is the first economic data to be releases on the first business day every month. It is an economic indicator of great significance not only for its timeliness but also for its close correlation to the GDP performance, which is why it maintained its high level of importance since its first inception at 1931. In an over simplistic explanation, a reading above 50 suggests an expanding economy and a reading below 50 suggests a contracting economy. The ISM index hit 52 in today's release, down from 52.9 in the last release. A reading of 52 from 53.9 suggests that the US economy is expanding at a declining rate. If the situation deteriorates further, the economy could fall into a recession. AS point of the index above 50 roughly approximates a 0.3% in GDP growth, as the ISM index falls, the US GDP is also being eroded away. Such a reading definitely increases the possibility of another rate cut and thus the action we saw today.

Today's action is also a reminder of the classical Efficient Market Hypothesis in action. The Efficient Market Hypothesis has been around for decades and has recieved bombardment from all fronts, especially from the real world trading floors of its inaccurate assumptions of a rational market full of rational well informed investors such that stock prices at anytime reflects all known information about that stock. This didn't used to be true during the time Eugene Fama suggested it in 1965 when information exchange was difficult and information is the privilege of the minority. Today, with the information and internet revolution, more and more the Efficient Market Hypothesis is coming to being (although at this point in time, the market remains highly inefficient in many ways). As more and more investors are well versed with the effects of a rate cut right now and have up to the minute information on all economic data, any future gains are quickly priced in way before that future event happens, such that, there are actually little or no gains left when that future event happens. This results in the scenario suggested by the Efficient Market Hypothesis. Certainly, the EMH is alive and well and currently being groomed into being by the world today despite its many short comings.

TECHNICAL ANALYSIS
The Dow made a huge break above the 14000 points level today on a discomforting mediocre volume. In fact, volume was somewhat on the same level as it was yesterday. This makes me wonder if this breakout is the work of a few institutional buyings. The Dow continues to be short term over bought at this time and needs to quickly find a foothold, making 14000 a support level before it can move comfortably further. That being said, looking at a longer time frame, we can see that the bullish channel established since the dragon tail formation I suggested back on 16 August is pretty much intact and goign strong. I would like to see the Dow digest some of the overbought sentiment by going sideways a bit along the 14000 level before moving upwards more as anymore upwards movement will increase the probability of a significant pullback and makes it ever harder for anyone to put on new positions.


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