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Saturday, September 09, 2006

The Market Is At Critical Levels Right Now

Another rehash of an article, this time by Mark Boucher. With my focus on sectoral and top-down analysis as my fund management strategy, this should be given a lot of consideration (also "Irregular Upmove" article). When the technology sector tanked, it CONFIRMED we are entering an economic slowdown. Now the performance of commodity and bond markets will tell us HOW QUICK this slowdown will materialize.

If commodity stocks breakdown, the slowdown is gonna happen earlier than expected, and all stocks in general will have to follow the downward trend. If commodity stocks hold up, then we might have some breathing room for a bit more of a rally. But eventually they WILL breakdown UNLESS WE HAVE A SOFT LANDING scenario. Bonds just confirm the negative or positive moves of commodities, they will move in the inverse direction (i.e. if economy slows down quicker, rates will have to come down quicker and bonds will rally while commodities come down).

We agree that the i-share IYM or SPDR XLB will be the key indicator, already OIL HAS BROKEN DOWN, the other commodities are holding up but are testing key support levels. Select technology, industrials and consumer discretionary stocks can be TRADED long as long as the rally keeps up, but they are LONG TERM SHORTS. Our long term longs are in utilities, health care and consumer staples. SHORT FINANCIALS WHEN COMMODITIES BREAKDOWN, this will push rates lower and pressure bank margins.


Commodity indexes and important commodities are starting to make a critical test of key levels this week that investors should monitor to determine how quickly the economic slowdown we've been expecting will materialize.

Oil prices are testing the last support that produced a rally to new highs, at the 68 level, which happens to coincide with 200-MA support. NORMALLY oil would decline in the event of a substantial slowdown in US growth, especially if accompanied by a global slowdown that we suspect is following the US one. It may well be however that this time oil stays up better than most other economically sensitive commodities because of geopolitical instabilities as well as the fact that global supplies have not yet picked up despite higher prices. Yet if oil breaks 68 and the 200-MA on a weak close, this will indicate more trouble intermediate-term for commodities and that the economic slowdown is clearly materializing.

The CRB index has already broken down through its 200-MA support and broken its weekly uptrend channel support line in place since 2003. This indicator is already signaling a slowdown. A test of the 316-320 level looms.

Gold is also getting close to some important support levels here. A descending triangle has formed with support at 600 (60 basis the 1/10 GLD shown below). The 200-MA is coming up just a tad below this level as well. A breakdown and week close below 60 and the 200-MA on GLD would paint a negative growth scenario unfolding and possible new leg of underperformance for resources and materials. A breakout over 640 would negate the potential breakdown in GLD. Note that silver is much stronger than gold and is not signaling the technical problems GLD would signal if it broke 60 and the 200-MA.

Materials stocks have been underperforming since May and look similar to GLD. (NYSE:IYM - News), the materials i-share is stuck in a triangle and its breakout of this pattern could be used to confirm a plurality of positive or negative moves by (NYSE:GLD - News), oil, and commodity indexes to help investors ascertain whether there will be some breathing room for a spell or a quick move toward the slowdown that is developing economically. If these can all hold and move above resistance higher, the market should be able to move irregularly higher for some weeks before fears of the slowdown begin to exert more influence. But if these all breakdown, the market will likely have trouble not reacting negatively to the growing focus of economic slowdown ahead.

We still like the sidelines and bonds better than stocks in general, or relative long/short pairs that we've been mentioning for some time. Housing indexes are falling at a swift enough pace now, that investors, particularly those with lingering net long exposure, should begin to watch out for a clear plurality of indicators showing that the focus is shifting toward fear of the growth slowdown. We suspect this will develop at some point before the end of the year - and with September and October historically the most bearish months of the year, investors should monitor signals of distress.

Internal breadth is improving some, but is still below levels normally associated with a sustainable bull market move. We continue to rate the macro environment as not highly reliable (except perhaps for bonds and (NYSE:TLT - News), which are likely to beat cash as the US slows down and have broken out of a base recently). Investors should continue to skeptically let market action be the guide. Strong rallies in the major averages accompanied by high volume to create a couple more follow-through days would be the first sign of more upside ahead. The real excitement may not come until the breadth of Top RS new highs starts to expand broadly and stocks meeting our runaway up fuel criteria begin to break out with some plurality. Until then, we still suggest keeping your powder mostly dry. We continue to suspect that breaking above 1320-27 and making new highs will be difficult for the market to do unless better volume and breadth materializes. We continue to regard this as a TREACHEROUS ENVIRONMENT where CAPITAL PRESERVATION SHOULD BE PARAMOUNT. Don't allocate heavily to anything that doesn't scream at you.

Lots of bonds and cash seem prudent here until the environment becomes clearer. Long/short pairs can be sparingly participated in as well.

Irregular Upmove

Rehash of an article by Gary Kaltbaum last Thursday entitled "Why I Think Yesterday May Have Been Important". It outlines the irregularity of the recent upmove in the Dow and S&P, with important sectors not budging. This highlights the importants of sector analysis in stock trading... the individual sectors will give you the most important signals about the general market and how you should trade consequently.


Wednesday's action was the first distribution day since the August 15th follow through day. Normally, I would tell you that one distribution day is not the end of the world...normally! But there has been nothing normal about the recent rally. In fact, I believe it has been a "less than meets the eye" rally. The dirty little secret is that the Dow and S&P have masked very poor action in many important areas of the market. The RAILS have not budged. The TRUCKERS have not budged. BIOTECHS have not budged. The AIR FREIGHTS have not budged. The RETAILERS have not budged. HOUSING is now breaking new lows. The DISK DRIVES hardly budged and are now gagging badly. The BROKERS have lagged. The LENDERS are acting like the RED SOX. COMMODITY stocks have just stayed in range...and most importantly, the SMALL CAP and MID CAP INDICES have lagged badly. All this while the Dow and S&P were close to cycle highs. Keep in mind, since May, we told you the Dow and S&P would outperform during this time.

I am now seeing tops in names like NOKIA, XILINX, TEXAS INSTRUMENTS, LAM RESEARCH and a bunch of TECH names...on the first bad day we have had. This could be meaningful. Why? Because if TECHNOLOGY and more specifically, the SOX tops...well, I don't need to tell you my thoughts. The SEMIS are vital to the health of the market and they may have just put in the high of this latest move. One day is just one day...but in the context of the past few months, it may just be an important day.

Other notes:

My thesis on OIL and OIL STOCKS may just be coming to fruition. OIL prices continue to head lower and OIL STOCKS are now plunging. This now includes some of the bigger cap names like COP, MRO, OXY and XOM. Remember, a break of $130 on the OIH and good night.

WORLD MARKETS may have also just topped. This has to be watched closely because WORLD MARKETS joining in to any downside would be a confirming negative.

SHIPPERS have now topped also. This group has been acting well for the better part of 3 months.

Friends, it could just be an interesting September...and oh yeah...the FED says everything is just fine.