Saturday, August 11, 2007

Timer Digest Commentary

Timer Digest CommentarySocialTwist Tell-a-Friend
Fari Hamzei

As we have mentioned in the past, each time that the market has faced a major financial debacle, we have witnessed a ramp-up in major indices' volatilities followed by a Volatility Re-Test, as measured by intensity (sigma levels). This is a must prerequisite for markets before they can resume their normal operations.

This Fed, led by the very able Dr. Ben Bernanke, has pumped in near $85 Bils in 3-day repos this week, buying MBS and Treasuries, in an effort to provide short term liquidity. We are still holding our Short SPX position from June 7th (1490.72). We do not think all the bad news is out yet. This week market actions reminds us of August '98 before the LTCM debacle with same pattern of massive volume on alternating large range days (positive and negative bars).

We have included two charts here. Timer Chart shows a short-term oversold condition with no immediate stabilization in sight as we enter August Options X week. The McClellan Oscillators for Advance/Decline and Up/Down Volume closed in negative territory on Friday even though indices closed mix.

The next chart shows the popular Vol Indices overlaid with sigma channels. This is the set-up part of the vol retest and we suspect the next 3 to 4 weeks will be very challenging trading environment till we go thru the vol retest. Our down-side target on the Dow is 12,500 and then 12,000.

We suspect the next shoe to drop won't be another sub-prime woe, rather it will be an exogenous news and if we had to pick it, it could be Perviz Musharraf getting booted out of Pakistan. That would give this market the badly needed wash out via a massive volatility retest and create for us a tradable low.

Do not buy dips -- rather SELL THE RALLIES..........

Wednesday, August 8, 2007

Rydex S&P

Rydex S&PSocialTwist Tell-a-Friend
Tim Ord

The following chart is the Cash flow ratio for the Rydex S&P. Since early 2003 bottoms have formed on the SPX when this ratio reached 1.10. Yesterday’s close came in at 1.11 and in bullish territory.

The next chart is the Trin 5 dating back for three years. The Trin or sometimes called ARMS index is the ratio of advancing issues divided by advancing volume then this ratio is divided by declining issues divided by declining volume. The Trin 5 is the closing Trin added up for five days. When the Trin 5 reaches past 7.5 the market is near an intermediate term low. We have marked on the chart with red arrows going back for three years when the Trin 5 reached 7.5 or higher. You can see the Trin 5 has a good history of picking out intermediate term lows. The Trin 5 closed yesterday at 8.18 and implies the NYSE is near or at a bottom now.

The next chart is the NYSE going back for three years with its McClellan Oscillator and Summation index. When McClellan Summation index reaches below -500 it implies the NYSE is very oversold and near an intermediate term low. We have marked on the Summation index with a red arrow when the Summation index reached the bullish -500 range. Once the Summation index turns up from below -500, it implies the NYSE has seen its low. The Summation index has not turned up yet but is in an area where bottom form.

The market is at an important junction and is about ready to start an intermediate term advance. We are long the SPX on 8/2/07 at 1472.20.

Editor's Note: watch for Tim Ord's upcoming book, "The Secret Science of Price and Volume", to be published by John Wiley & Sons, in February 2008.

Monday, August 6, 2007

Sovereign Wealth Funds, Volatility and Markets

Sovereign Wealth Funds, Volatility and MarketsSocialTwist Tell-a-Friend
Sally Limantour

The recent correction in the stock market has many worried that liquidity will dry up as private equity deals diminish from their torrid pace. While this may be true the new darlings of investment – the “sovereign wealth funds” may pick up the slack. Sovereign wealth funds (SWF) are basically pools of money derived from a country's reserves and set aside for investment purposes that will benefit the country's economy and citizens. The funding for SWF comes from central bank reserves that accumulate as a result of budget and trade surpluses, and even from revenue generated from the exports of natural resources.

Government investment funds have been rising and China’s recent investment of $3 billion into Blackstone and the purchase of Barclay’s by the CDB (which also came with a board seat) shows how they want to develop their economies and will give China access to operations in emerging markets.

The numbers are staggering. For perspective it was only five years ago governments were sitting on $1.9 trillion in foreign currency reserves. This has grown to $5.4 trillion which is more than triple the amount in the world’s hedge funds. This excess cash is being moved into sovereign wealth funds and will change the landscape going forward.

A number of ramifications will emerge from SWF and currently concerns from protectionist measures to financial stability are being discussed. The US government has stated that the spread of sovereign wealth funds could create new risks for the international financial system.

One theme running through the SWF story is the idea that countries are diversifying from US dollars and placing their funds in other more tangible higher yielding investments. They want to diversify their holdings and this is not bullish for the US dollar. This adds to the move by other countries that are beginning to accept other currencies for purchases of oil and other products.

I have long held the view that we will see increased volatility in many asset classes going forward. The growth of SWF could be a factor in this as Mr. Lowery of the US Treasury has warned that SWF could fuel financial protectionism and has said “little is known about their investment policies, so that minor comment or rumors will increasingly cause volatility in markets.”

We all know markets do not like uncertainty and we are entering a period where “deep opaque pockets” will be making bigger and more ambitious purchases through state owned companies such as Gazprom and the China Development Bank (CDB).

My focus with regards to SWF is the natural resource sector. It is well known that China is basically resource poor and needs to import many of commodities to feed, house and mobilize their 1.2 billion people. With China set to move up the food chain it is only natural that they would use the SWF to secure their commodity needs by directly buying into companies that produce natural resources.

In a recent interview Marc Faber was stating that China will have to import most of their commodities and he looks at the price of coffee as an example and says, “If the Chinese just go to the per capita consumption level of say the Taiwanese or South Korean, they will take up the entire coffee crop of the world.”

As both China and India grow the demand for commodities will increase. The voracious appetite for commodities should continue and I would expect the next 5-10 years will see continued advances in many of the natural resource prices and the related stocks.

Water stocks, food, timber, mining and oil should continue their bull market and look for these SWF to move in this direction as well to secure their commodity needs for the future. Remember, 1 billion people currently use 2/3 of the world’s natural resources.
5.6 billion people use the other third. Meanwhile 3 billion are discovering capitalism and want “stuff.”

During this time while the stock market is taking some heat I am gathering my list of names in each sector and will share these with you going forward each week.

Water, oil and energy, food and metals are still in bull markets and I expect another leg higher in many of these will occur sooner than later.

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Two weeks ago I was talking about how the market might stage and expiration related rally that would fuel it to new all-time highs. The basis for that prediction was strong earnings and a large open interest of in the money calls. When that rally failed to materialize, a warning shot was fired.

A warning shot was also fired last February when the S&P 500 dropped 50 points in one day. Liquidity and credit risk were perceived problems and traders headed for the exits at the first sign of trouble. The difference between then and now is reality. This week hard numbers were attached to the losses stemming from loose lending practices. Technically, this decline has caused serious damage. The SPY penetrated the 146 support level. That represents the breakout from last April and it also represents the 200-day moving average. This juncture is a pivot point. If the market continues to trade below this level, lower prices lie ahead. If the market can recover and rally above this level a bounce and recovery could materialize.

There is new information that needs to be digested by the market and that process will take a couple of months. In the meantime, there will be bullish and bearish opportunities. It will be critical to find relative strength and weakness within the market.
I still believe that a year-end rally is in the cards. The earnings growth rate is in the high single digits at this stage of the earnings season. That is considerably ahead of expectations. Interest rates have declined and that is also bullish for the market. Oil prices backed off from their highs when forecasters lowered their expectations for hurricane season. Foreign markets are holding up relatively well and global expansion should carry us through this soft patch.
Next week the economic releases are very light and I don't feel they will drive the market. These are some of next week’s earnings announcements: NILE,HET, DRQ, TXU, TYC, ATW, CSCO, FLR, MDR, WYNN, AUY, AGU, BIG, FWLT, FLS, GES, LVS, CRM, ZUMZ, GME, SHLD, BRCD, DELL, FMD, ANN

I am expecting another volatile week. As the market tries to determine its next direction, it makes sense to lay low. Many traders are taking time off and thin trading is adding to the intraday volatility. I will follow their lead and I will be taking the week off as well. I will not be producing a new report next week, but I will update the current positions.
I’ll be clearing my head and preparing for the opportunities that lie ahead the rest of the year. If you decided to trade next week, keep your size small, stay balanced and take advantage of the high implied volatilities by selling out of the money credit spreads.

Sunday, July 29, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Last week I did not like the way things were shaping up. I expected to see continued strength from cyclical stocks as they posted good earnings and I expected to see strength in the financials once they demonstrated their lack of exposure to tightening credit markets. I believed those two events were going to rally the market to new all-time highs during option expiration week. The negative reaction from both groups told me that the market was in trouble. When I looked ahead at this week’s economic numbers I did not feel that there were any that might influence the market. In hindsight, that was fairly accurate. Housing numbers were the fly in the ointment. The market has become numb to the bad news from the sector and it had braced itself for more of the same.

The shock came when CFC, considered to be one of the sharpest lenders, hosted its earnings conference call. They described how loan defaults are spreading to other areas and the market panicked. CFC has been proactive in managing their risk and the market was shocked. As the week unfolded, the selling pressure increased. Once the market gained selling momentum the buyers pulled their bids. After a few air pockets, the bottom fell out Thursday. At its worst level, the market was down 50 S&P 500 points. It had small afternoon rally and that pared some of the losses. On Friday the market looked like it might fight off a number of attempts to push it lower. The bears got their wish in the last 30 minutes and once again, the bids disappeared going into the weekend. The drop felt like there were no buyers, as opposed to too many sellers. I won’t discount the move since it easily made its way down to a major support level at SPY 146. I did not expect that.

The magnitude of the decline this week was bigger than what we saw in February. In fact, this was the worst 5-day period since the year 2000. The market has new information that it needs to digest and it’s likely that this round of selling will take more than a few weeks to work off. The market will bounce and test support levels during the next two months before it settles down. Increased volatility will remain through September. Any attempt at a year-end rally will have to include the financials and tech.

Next week’s economic releases will include personal income, the PCE price index, Chicago PMI, consumer confidence, ISM and the Unemployment Report. The unemployment report is the most important release and it has been bullish for the market every month this year. A 4.5% unemployment rate and hourly earnings that are outpacing inflation are positive for the economy. I believe this report and end of month buying will support the market and rally stocks from an oversold condition. I’m not looking for the market to resume the rally; I just feel it will repair some of the damage.

These companies are slated to release earnings this week: APC, GEHL, HUM, MTW, MNST, RSH, VZ, TSN, VMC, AVP, BWLD, CAM, RIO, XRAY, MRO, MET, NVT, VLO, ANDE, CBI, CI, ERTS, GRMN, PH, SOHU, SBUX, TWC, TRW, ATK, AMT, RATE, CKP, EK, JSDA, RDC, WLT, PG, TM, WY.

If the SPY closes below 146, my bias will switch from bullish to a neutral. Earnings have been decent and interest rates are coming down. I feel U.S. stock valuations are reasonable and as a nation, we have full employment. These are all positives for the market.

That said, I do have some concerns. When money is loose, people get sloppy. That’s true for home buyers, bankers, builders, asset managers… Tightening credit markets remove inefficiency. American consumers are tapped out. We are entering our 27th consecutive month of a negative personal savings rate. This can’t go on much longer. Global equity risk exposure is also a real danger. No one really knows the magnitude of the yen carry trade. We can only hope that traders and brokerage firms reacted to the warning shot that was fired last February. As credit tightens, brokerage firms raise their margin requirements. If hedge funds have to reduce their holdings, that selling could spillover into our market. I also suspect that many emerging market equities are overvalued.

Saturday, July 21, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Two weeks ago the market staged a convincing rally to new all-time highs. The buying continued right in the close Friday and it looked like the table was set for an awesome option expiration week. Throughout the course of this last week the market had some large intraday swings but it was unable to add to the breakout. Going into the week I expected solid earnings from financial stocks to spark that sector and fuel the market.

Merrill Lynch and State Street Bank both posted big numbers that handily beat expectations. To my surprise, both stocks sold off even though their exposure to subprime lending is limited. Clearly, higher interest rates are the larger concern. They have the potential to impact consumer spending, corporate financing, and private equity deals. Without the help of the financial sector, a sustained rally is unlikely. These stocks comprise 20% of the S&P 500. Tuesday, Bear Stearns dropped the second shoe on subprime lending woes when it announced its hedge funds in that area were going belly up. The magnitude of this problem has yet to be identified. In the second day of his testimony before Congress, the Fed Chairman said that subprime lending issues will get worse before they get better. Years ago, home buyers opted for 3-year and 5-year ARMS and those adjustable rate mortgages are just starting to kick in. As long as the unemployment level stays below 5%, I believe homeowners will be able to adjust their spending patterns and avoid catastrophe.

In the chart you can see the QQQQ/SPY overlay. Tech stocks have been strong relative to the SPY. They broke out and they have continued to make advances while the SPY has stalled. Tech stocks are still 50% below their peak from 2000 and they have lagged the rest of the market. I have not bought in to the recent tech rally because guidance has not been raised. Only 13 stocks account for the recent NASDAQ 100 rally and the move lacks depth. Last week, two tech leaders (Intel and Google) failed to meet expectations. Cyclical stocks were even more disappointing. They released solid earnings and in many cases beat expectations, yet the stocks sold off after the news. Friday, Caterpillar announced earnings and missed expectations. This overall price action tells me that stocks in general are “fully priced”. Unless we get an extraordinary round of earnings next week, I fear that the market might be putting in a temporary top.

I don’t believe that the economic numbers next week will drive prices. On deck we have new home sales, durable goods, GDP and consumer sentiment. Interest rates will stay put for the rest of the year and that places greater importance on earnings.

I can’t possibly name all the companies that are announcing this week, but here is a list of some that I’m interested in: ACI, ALTR, AXP, CNI, RE, HAL, LNCR, MRK, NFLX, TXN, STLD, AKS, AMZN, T, BTU, BP, BNI, CDWC, DD, LLY, ENR, LM, LMT, NOC, PCAR, PNRA, PEP, PCP, SII, UPS, VRTX, AKAM, AAPL, CL, DADE, FFIV, FMC, FCX, GD, OSG, SLAB, TSCO, ZBRA, ZMH, WLP, MMM, AET, AMGN, BZH, BWA, BDK, BG, CLF, CRS, F, KLAC, NTGR, ODP, POT, SI, SPAR, DOW, WEN, WDC, BHI, CVX, IR, LZ, SEPR.

As I look at the list, I can’t visualize where the strength is going to come from. Energy, mining and heavy equipment are all priced for performance. The tech stocks on the list have performed well and they are trading at lofty P/E ratios. The chemical stocks have the potential to outperform and they are just showing signs of strength. Unfortunately, they won’t be able to carry the market. I’m expecting a choppy week of earnings and the market will do well just to hold its current level. If it falters and it falls below SPY150, it could retest the relative lows we made in June. I would be suspicious of any rally that does not include financials stocks.

Monday, July 16, 2007

Takeover Mania, Uncle Ben and Earnings Season

Takeover Mania, Uncle Ben and Earnings SeasonSocialTwist Tell-a-Friend
Sally Limantour

Another strong week on Wall Street and the focus continues to be on takeover activity and stock buyback news. Vodaphone is considering a $160 bn takeover bid for Verizon which would rival AOL’s takeover of Time Warner and Vodaphone’s earlier acquisition of Mannesmann.
The FT this morning is quoting Stephen Jen, Morgan Stanley’s currency strategist on major emerging market economies. He is saying that while cheap credit may be drying up the emerging market economies are flush with cash and their growing interest in establishing sovereign wealth funds could well drive equity and other capital markets around the world to new heights. ”Major emerging market economies currently have a collective $1,500bn worth of excess reserves, - defining “excess” as official foreign reserves exceeding the amount needed for liquidity purposes, based on their “conservative rule-of-thumb”.

Dr. Bernanke is to appear before the House and the Senate this week. Those appearances which occur Wednesday before the Senate and Thursday before the House will dominate the discussions for the week. The market will be listening for any mention of inflation concerns as well as thoughts on the economy and housing.

The news is of better-than-expected earnings reports thus far, and 2nd quarter reporting is in full swing. Expectations for further upbeat earnings will support the market, but at what point does high energy prices, weak consumer spending, subprime problems and higher interest rates come into the picture? I am still looking at mid August for this market to correct, but blow off phases can be much longer and stronger than we can imagine.

Commodity prices are strong lead by the metals and crude oil. The gold ETF (GLD) rose 60% over the past two years while stocks such as Barrick has risen 30% and Newmont +14%. Perhaps it is time for the gold mining stocks to play catch-up. Attention will be paid to future earnings from gold mining operations.

Energy is on a tear as I pointed out the spreads weeks ago were starting to show the tightness. The market is showing demand is so strong that crude oil is not being moved into storage, but brought to market. That is bullish and should keep prices firm.

Good Trading to All

Sunday, July 15, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Monday, the market tried to resume the prior week’s holiday rally. It struggled to add to the gains and by Tuesday morning and it looked like the market had added a third lower high to the technical pattern. If you had connected the tops from each rally you would have seen a downward sloping resistance line. Sears and Home Depot provided a dismal glimpse of retail sales and Moody’s announced that they were about to downgrade sub-prime lenders. Tuesday morning’s decline was exacerbated by a prepared speech that was delivered by the Fed Chairman. By late afternoon, the market was in one of its typical “no-bid” slides. The S&P 500 closed 20 points lower. After sleeping on it, traders realized that the Moody’s news was already “baked in” and that Ben Bernanke did not shed any new light during his speech. Wednesday, the market started off on a nervous note and it rallied strong right into the close. Thursday, the market jumped higher after retail sales beat dismal expectations. Legitimate buying and short covering fueled the market to its largest one day gain in years. Friday, GE posted better-than-expected earnings and the market was able to make new all-time highs.

As I’ve been saying, no matter how ugly this market looks, it has the potential to annihilate short sellers at a moment’s notice. In this week’s chart you can see the strong trend and the temporary consolidation phase we went through the last two months. The big picture looks as bullish as ever. The trend lines are in place and there are multiple breakouts to suggest a continued move. If you simply viewed a daily chart, the market looked like it was ready to rollover. Over the last few weeks I have also pointed out that the volatility has increased. That is normally a precursor to a big breakout. That’s exactly what we got this week and I believe we will see continued strength next week.

From an economic standpoint there are a few big releases (PPI, Capacity Utilization, CPI, Housing Starts, LEI, Philly Fed.), but all eyes will be on the inflation numbers. The Government’s definition of inflation is different from mine. I feel that prices are moving higher in many areas (healthcare, college tuition, gasoline, travel), but those increases are not reflected in their calculations. As long as the market feels that inflation is contained, that’s all that really matters. The market has actually been able to rally off of the last couple of PPI and CPI numbers. I expect the same this week. In fact, I believe that all of the economic releases during the next two weeks will take a back seat to earnings. Earnings and interest rates drive the market and right now interest rates don’t look like they’re going anywhere.

Next week we will get a huge round of earnings releases. Here are some of the stocks that are on deck: ETN, GWW, REDF, AMD, FCX, MER, MOT, NFLX, PCAR, INTC, JNJ, MAN, WFC, YHOO, ABT, JPM, PJC, AOS, UTX, MO, EBAY, PFE, TER, TEX, ALL, JNPR, ME, DHR, HOG, HSY, HON, POOL, RS, TXT, VFC, BAC, BAX, CY, GOOG, IGT, ISRG, MSFT, NUE, BRCM, COF, SNDK, STX, SYK, BIDU, CAT, C, SLB. There are some great plays and some traps that lie ahead.

Strangely, the market is taking comfort in higher oil prices believing that it confirms robust global expansion. Liquidity is creating a supply/demand imbalance in equities. Flush with cash, corporations and private equity firms are aggressively buying shares and they are taking the shares out of circulation. Meanwhile, new funds continue to flow into the market. The macro conditions are in place for a continued rally and as good as things might seem in the U.S., we are the weakest link internationally.

I believe the market rally is legitimate and that earnings and option expiration will overpower any potential weakness in the economic releases. The market has rallied to a point where option related buy programs will be prevalent next week.

Saturday, July 7, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Last week the market did not take a holiday with the rest of the country. It started the week strong on the coat-tails of M&A activity and it closed higher on Monday. That theme was revisited Thursday when Blackstone announced a $26 billion takeover of Hilton Hotels. Takeovers are creating a feeding frenzy and at any moment a stock can jump 10% higher on speculation. It is almost impossible to short stocks in this market. The trend is so strong that “even the dogs are barking ". That's “the street’s” way of saying that the weak stocks are rising with the tide.

The table was set for a positive reaction to the Unemployment Report. As I mentioned last week, this report has generated a positive reaction each month this year. Initially, strong employment numbers pushed the 10-year bond yield over 5.2% and the market reacted negatively. Traders digested the news and quickly concluded that full employment might actually be good for the economy. The wage inflation component came in at .3%. That is a little hot, but it was within expectations. Next week, the economic calendar is fairly light.

Consumer credit, wholesale inventories, trade balances, retail sales and consumer sentiment are scheduled for release. Retail sales has the potential to impact the market. As a sector, retail same-store sales only increased 1.2% in the last week of June. Last Tuesday, we learned that the percentage of loans that were 30-days past due rose to their highest level since 2001. Delinquencies on home mortgages are rising due to adjustable-rate loans and May marked the 26th consecutive month where the personal savings rate was negative. (As a side note, I will ride this market higher, but the negative savings rate has me very concerned 3-5 years out. Aging baby-boomers must start saving for retirement and that noose will draw tighter with every passing year.) The retail sales number will give us some insight on the strength of the consumer. My suspicion is that the number will come in light and the blame will fall on higher gasoline prices and the weather. Ironically, gasoline prices have actually come down during the last few weeks. I believe that inflation, debt levels and higher interest rates are tapping the consumer out.

Next week, the new earnings season will begin with Alcoa on Monday. The big releases won't kick in for another week, however, there are a few interesting stocks this week (AA, PEP. INFY, DNA, FAST, TXI, YUM, CTAS, GE). Yum could set the tone for the restaurant group. I feel this strong stock may be faced will the same issues plaguing the retail sector. INFY will give us some insights on rising wage inflation in India. DNA could spark a lackluster biotech sector. GE is one of the largest stocks in the world and it recently had a three-year breakout. I expect solid earnings from the industrial divisions to more than offset weakness in other areas.
From a technical perspective, the SPY is within striking distance of the all-time high. Even the tech stocks are making a new multi-year high and the QQQQ has shown relative strength. I still struggle with this sector because I have not seen a corresponding rise in guidance. Certainly there are pockets of strength, but overall, the earnings have not been revised upwards. Consequently, I still like keeping my money in the heavy equipment stocks and the energy group. I expect companies with an international footprint to do well. I'm a bit more skeptical of companies that rely solely on domestic revenues.

The market has become much more volatile in the last month and I suspect a major move is looming. Earnings are likely to determine the direction. Last quarter, low ball estimates were handily exceeded. Now the expectations have been adjusted and with rising interest rates it will be more difficult to surprise “the street”. The bid to the market is very strong and I am expecting a choppy move higher from this point on. It will be important to buy dips and to take profits on any rally that loses its steam. That pattern will continue until the Fed raises rates. I'm not expecting that this year so I believe we will have a good run the rest of the year. Stock selection will be critical.

Sunday, July 1, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Last week the market opened with a whimper. Monday morning prices followed through to Friday's decline. Throughout the day it touched the SPY 149 support level and it bounced. Tuesday the market added to the decline and it broke below that support level. Just when things looked like they might finally breakdown, a snap back rally on Wednesday saved the day. Prices started out unchanged and once the bears exhausted their selling, the bulls took charge and rallied the market throughout the day. By the close, the S&P 500 futures had posted a 20 point gain. Thursday, a weaker than expected GDP report included "hot" inflation data and the market somehow viewed that as positive. Before the Fed released its FOMC comments, the market was moving higher.

Their rhetoric changed slightly and a few new words were added. After the release the market gyrated back and forth while it tried to decode the secret message. Friday, the PCE index showed that prices increased .1%, last month leaving the one year rate at 1.9%. That is just under the Fed’s 2% target and the market liked the news. I'm amused at the inflationary analysis. These numbers exclude food and energy. This is analogous to my neighbor analyzing my putting, "… apart from speed and direction, it was a great putt.” Soon they will need to exclude additional items and the report could read like this, “… excluding food, gasoline, health insurance, college tuition, medicine and travel - inflation is contained.” Obviously, the Fed is still concerned about inflation even if it doesn't show up in the standard metrics. Consequently, I believe the best case scenario is that rates will remain unchanged the rest of the year. Foreign interest rates are on the rise and it's widely expected that China will be the next country to raise.

A few weeks ago I came to the conclusion that the market would fall into a choppy, sideways trading pattern. My analysis was based on two facts. Earnings had been released and interest rates will remain unchanged. Those are the two driving forces behind the market and they are both "knowns". The market is searching for something to sink its teeth into and in the end; all of the little knee-jerk reactions will be meaningless. I did not expect an increase in volatility. It seems that once an intraday direction has been established, the buyers or sellers (whichever the case may be) step aside.

In this week's chart you can see that the volatility has recently expanded. Prior to June, the market was trading in a nice tight pattern. Now, large intraday price swings are common. Wednesday really caught my attention. Tuesday the market had a large range and it opened near the high and closed near the low. Wednesday the exact opposite happened, however Wednesday's open was below Tuesday's close and by the end of the day Wednesdays close eclipsed Tuesday's open. This created a large green candlestick and this is known as an engulfing pattern. It is normally considered to be bullish. What makes this so unusual is that the engulfing pattern occurred a day after an extremely large range. Friday was another example of a reversal. After a higher open, prices weakened and the market sold off going into the close. The S&P 500 has a 20 point range. An increase in the daily range usually precedes a large move. If I had to assign probabilities I would give the market a two thirds chance of breaking out to the upside and a one third chance for a breakdown.

The macro conditions are still in place for the market to move higher. Earnings are solid, balance sheets are strong, employment is robust, valuations are in line, interest rates are relatively low and inflation is "in check". The bid to the market is very strong and the market will continue to adjust to the notion of higher interest rates.

Next week’s economic releases are highlighted by the Unemployment Report that comes out Friday. Over the past few months, the market has rallied after the number. "Full employment" and moderate wage increases are good for the economy. The unemployment estimates have been in line, diminishing the importance of the ADP employment index (Thursday release). The ISM manufacturing and services numbers are also unlikely to have a major market impact in a quiet holiday setting. On the earnings front, I don't see a single stock that would catch my attention.

Next week you can expect a quiet week of trading. I believe that the recent volatility will start to calm down.

Have a great holiday!

Disclaimer and Terms of Service

© Copyright 1998-2023, Hamzei Analytics, LLC. Hamzei Financial Network is published by Hamzei Analytics, LLC, Naples, FL 34112, (310) 306-1200. The information herein was obtained from sources which Hamzei Analytics, LLC believes are reliable, but we can not and do not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Hamzei Analytics, LLC or its principals may already have invested or may from time to time invest in securities or commodities that are recommended or otherwise covered on this website. Neither Hamzei Analytics, LLC nor its principals intend to disclose the extent of any current holdings or future transactions with respect to any particular security or commodity. You should consider this possibility before investing in any security or commodity based upon statements and information contained in any report, post, comment or recommendation you receive from us. The content on this site is provided as general information only and should not be taken as investment or trading advice. Any action that you take as a result of information, analysis, or conclusion on this site is ultimately your responsibility. Always consult your financial adviser(s) before making any investment or trading decisions.