Thursday, November 8, 2007

Market Timing

Market TimingSocialTwist Tell-a-Friend
Fari Hamzei

First chart is our Timer Chart for SP-500 Cash Index (SPX). Notice that McClellan Osc for NYSE closed today at-211 level. This is a short-term extremely oversold signal. Given that Nov Options X is next week and we often see a counter-trend move during options expiry, odds are that we should go up a bit here into next week, make a bunch of put options go worthless (the Options MMakers have to pay rent too come Dec 1st !!), and then cascade DOWN. What is very clear now (since my last post here on Friday October 19th) is that Cumulative ADVANCE/DECLINE Line (yellow line graph) peaked this year in early June and with next two all-time highs in SPX, the Cum AD Line has setup a Bearish Divergence. In addition, we closed below its 200-day Mov. Avg.(white line graph), for the first time since Sept 10th.

Same analysis goes for the next chart: the NASDAQ-100 Cash Index (NDX) -- except that one has to be reminded that the CUM AD Line for NAZZ peaked in FEBRUARY of this year. This does not bode well for the LONGs' argument.

Next Chart is our Wyckoff chart and what I want to bring to your attention is the fact that while DJIA & SPX each made a three-weeks lows yesterday (channel breakdown pattern), DJ Trans put in a multi-month low and closed near its 2007 Open. This is, again, an ominous sign for our equity markets as a whole as the rate of economic expansion slows down.

Next chart shows Russell 2000 (RUT). Here we go again, another six weeks low (since August 16th when Uncle Ben sent some of our SPX trading brethrens into the next world prematurely in order to save Citigroup from imploding). Risk tolerance is now at a new premium not seen recently. Bids to the market should evaporate. Stay defensive.

Volatility is increasing in both NYSE and NASDAQ markets but as next two Sigma Channels charts show you, they are NOT at exhustion levels YET.

Most probably, this is where I think we will go to on this first leg down: 1422 on SPX. which corresponds to -2 sigma at this time. There is an outside chance, we may get down to -3 sigma (1383). Notice this is the Weekly Chart. So it will take time to get there. My guess is that this will be in the next 3 to 4 weeks or so. If 1383 does not hold,... well, we shall get to that on my next post.

Bottom Line: For Intermediate-Term Timing, STAY SHORT.

Sunday, October 28, 2007

Governments and Central Banks are Completely Incapable of Keeping Tomorrow from Coming

Governments and Central Banks are Completely Incapable of Keeping Tomorrow from ComingSocialTwist Tell-a-Friend
Clyde Harrison

Before I talk about the future I’ll spend a moment on the present.

Last year if you had enough breath to fog a mirror you could get a home loan. Anyone who is over 30 knew last year when they saw the TV ads “will loan you 100 per cent of the price of your new home with no income verification,” there was going to be a problem. Now all of a sudden sub prime has turned into submerged prime. It’s moved from contained to contaminated. People traded houses like crazy uncle Fred traded pork bellies until he lost the farm. CNBS, the financial marketing show is learning the difference between liquidity and leverage. Four years of recklessness will not be cleaned up in 4 weeks. Hedge fund guys are learning you can’t sell to the model. The model has no money. To big to fail is turning into to big to bail. The markets are doing what the FED refused to do – tighten.

The more leverage you use and the higher your IQ, the more likely you are in trouble. The latest treasury plan operated by Goldman, I mean Paulson, for the S.I.V.’s saves Citi and the large banks, but the dollar falls through the holes in the SIV.

The latest brokerage firm reports are like mushrooms. Keep them in the dark and cover them with manure. But the Bernanke Fed has caved into the Banks and Wall streets demand to bail them out of bad loans, increased inflation will be the result on Thursday, October 11, 2007. The New York Stock Exchange hung a 30 by 40 foot sign on the building – “Wall Street, You Rule.”. Possibly the top.

God gave me the ability to recognize the obvious, some common sense and a sense of humor to stand the first two.

The one trend in place is the overall advance of mankind. It began when we emerged from the cave.

The world is going through a dramatic change. The world has discovered capitalism. China and India are transforming their economies from poor agrarian economies to industrial powers. The effect of these changes will be felt for years.

One of my favorite quotes is, “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for life.” Today in order to teach a man to fish, you need two fishing licenses, a state boat sticker, OSHA approved life jackets, EPA approved weights and hooks, you pay a park fee, obtain a fire permit to cook the fish and an EPA permit to dispose of the waste. Thanks to the government, fish you catch costs 8 times as much as the fish you purchase in the supermarket, caught overseas.

We have reached a point where you need Government permission or a permit to do anything, including to your own property or with your own family. What happened to freedom and liberty?

When I started in the investment business 39 years ago, the Golden Rule was “Do unto others as you would have them do unto you.” In a few years it was corrupted to, “He who has the gold makes the rules.” Today it has been totally corrupted to, “He who makes the rules gets the gold.”

Our educational system is failing the students. US high school graduates do not have the knowledge to pay teachers pensions.

Students in the 3rd grade test 3rd in the world for knowledge. Upon high school graduation, they test 70th in the world.

The moral values they are taught are: diversity, tolerance and respect for the environment. Jefferson said “without an educated voter, the republic will not stand.”

What’s the latest suggestion from the national education association? It is to grade papers with purple pencils instead of red because red hurts the students’ feelings and to ban the game of tag at recess, because it is too aggressive. These graduates are not prepared to compete in the world labor market. Congress uses the act of helping children as a ploy to gain more power. The most threatening disease to our children is the national education association. Congress’s reaction: it sells out the children’s future every election cycle for a check from the NEA.

Governments in most cases and most places make things worse. George Washington said “Government is not eloquence, it is not justice; it is force. Like fire, it is a dangerous servant and a fearsome master.”

The definition of politics is the advance auction of goods that have not yet been stolen.

Whenever a government does something for someone, it must do something to someone. If expanding government were the solution, Russia would have been paradise.

In the US, we have a two party system and what a party they are giving themselves. Since 1960 government spending has grown 8 times as fast as the GNP.

Republicrats borrow and spend. Democins tax and spend. From 2000 to 2005, federal spending increased 38.2%. Federal debt increased 40.5%.

The government taxes and regulates success and subsidizes failure. The Government’s motto, “If it ain’t broke, fix it until it is.” .

Today lawyers run the government. Seventy-three percent of the cabinet are lawyers. Eighty-five percent of the gang of 535, the Congress are lawyers. Lawyers train on the principle that when there’s a solution to a problem, they stop making money. You know the system is corrupt when Congressmen spend 6 million to get a job that pays $178,000 per year. The donors of the 6 million are expecting a 10,000 per cent return from the tax payer - just like Hillary was able to make with a little help from her friends trading commodities.

In 1987 the US signed a treaty allowing Japanese lawyers to practice in the US and US lawyers to practice in Japan. At the signing there were a total of 14,000 lawyers in Japan and 650,000 in the US. Two years later, Japan entered a depression. It is just starting to recover. Just coincidence? Maybe.

Consider the following:
The Lord’s Prayer: 66 Words;

The 10 Commandments: 179 Words;

The Declaration of Independence: 1300 Words;

U.S. Government Regulations on the Sale of Cabbage: 26,911 Words; and

U.S. Income Tax Code - simplified: 1,607,000 Words.

It would be a great improvement if the government respected individual’s rights as much as they respect the rights of the caribous.

The government is already too large and too expensive.

The only thing Washington with the help of the legal system seems capable of doing, is elevating the plight of the victim.

A recent poll stated 14 per cent of those surveyed thought congress was doing a good job. I immediately wondered “who are these 14%?” Don’t they have any access to information, no TV, no newspapers, not even a radio? Then it dawned on me. 19 percent of the people work for the government and at least another 10 percent receive direct payments from the government. So the real results of the survey are 100 percent of those in private industry think the congress sucks and half of those who work for the government or receive direct payments from the government think congress sucks.

Where has government been effective? The war on poverty. 2 trillion spent to eliminate poverty completely. The war on drugs, 400 billion spent, 2.5 million in jail, eliminating illegal drugs everywhere.

Border control securing our borders keeping out all shady characters.

Some years back, people came to America for the opportunity, today they come for the benefits.

In New Orleans $127 billion wasted to date. $420,000 per family that lived in New Orleans prior to Katrina flushed down the FEMA toilet.

With all these great successes, it’s no wonder some people want government to take over the rest of health care, the part they haven’t already screwed up.

But some good will come from this. Social security might be saved because baby boomers will die waiting in line for health care. Social security tries not to send checks to dead people – so, there’s a chance it will remain solvent.

Bush Sr. simplified taxes.

Now we only tax the living and the dead. Clinton promised to tax only the rich. Once in office, he defined rich as, “Those Americans with Indoor Plumbing.” Bush Jr. said he cut taxes but the tremendous increase in spending and debt means W just delayed tax increases.

God, who created everything only wants 10%!

The demands of the majority are always greater than taxation alone can provide and
that’s where the FED comes in.

Between 1800 and 1913, the value of the dollar was more or less constant.

Since the Feds creation in 1914, the value of the dollar has dropped 97%.
During Allen Greenspan’s term, the dollar lost 37% of it’s value.

The 1% Fed funds rate moved the savings rate to between zero and zip, while mortgage debt increased 62%.

The last central banker to get it right was Joseph, in the Bible. Seven good years followed by 7 bad years. The Fed is like the Post Office giving out money instead of stamps. Faith in the Fed is based on elaborate mathematical models relying on the breathtakingly faulty assumption that human beings behave rationally.

The FED’s invisible hand of intervention is trying to keep interest rates as low as the world will allow. But the world is becoming a bit nervous. The US has borrowed over $4 trillion from overseas. Some day it will be repatriated. The exchange of IOU’s for wealth will go into reverse. We will get our paper back and have to return real wealth.

Japan and China have purchased massive amounts of US treasuries to stem their decline. They loan us money to buy their products because they need the US as a customer. When will this end? It will end when the Asian Tigers develop a consumer credit system and their three billion plus citizens become the customer. At that point we will no longer be able to live beyond our means - the dollar decline will accelerate and interest rates will rise dramatically.

The dollar bears the legend on it, “In God We Trust.” Placing your faith in the Fed could be a dangerous plan. Someday, the dollar could fall to its intrinsic value. Denial is not just a river in Egypt.

Currencies do not float, they sink at different rates. Currencies are abstractions not redeemable in any specific amount of anything, they are an I owe you nothing certificate.

Foreigners currently own 45% of US treasuries. The FED can create $30 billion of paper in a week. They can lower rates, but it won’t create one drop of oil, one pound of copper or one bushel of rice.

Now we have Bernanke as the new head of the FED. Bernanke has studied the depression and deflation at great length. He has stated the FED has many options to avoid deflation including dropping dollars from helicopters if necessary, earning him the nick name “Helicopter Ben.”

The FED is attempting a neutral interest rate policy. Neutral for the FED is like pornography to the Supreme Court. They can’t define it, but they will know it when they see it.

We all work for something. Our government manufactures with no sweat, no work, no creativity – just turn on a computer and create more dollars.

Today there is a disconnect between the man on the street and how he feels and how the government tells him he should feel.

The Bureau of Labor Statistics over time has made tiny incremental changes in the way they manipulate the statistics.

In a bipartisan effort, presidents and the FED chairman have tried to make the news just a little better. Over time, these tiny changes have begun to add up.

If we just go back 20 years and remove these changes. Unemployment today would be about 8%, the CPI would be about 7% and the GNP growth would be 0.

On the unemployment front, if you were a discouraged worker, you were counted until the Clinton administration. During Clinton’s reign, workers who were discouraged for over a year were taken out of the number. That knocked 5 million off the broader unemployment report. U-3 is now the reported number of 4.6 but if you look in the footnotes, U-6, the old number is over 8%.

The real degeneration over time is the CPI. In the 90’s, Michael Boskin at the council of economic advisors and Greenscam at the FED wanted to fix the CPI simply stating that it was overstating inflation. They created substitution assuming that if the price of steak went up, the public would substitute hamburger. The CPI was originally designed to measure a fixed basket of goods for a constant standard of living. Today it has changed to a basket of survival. By the ounce, Wheaties now cost more than steak.

If inflation is understated then reported real growth (the GNP) will be overstated.

Bob Reich, in his memoirs wrote that they found in their polling that if you could overstate economic growth, understate inflation, tell people things were are better than they really are. It could help you win a tight election. That was their conclusion, so of course the numbers were adjusted.

Last year if you didn’t eat, didn’t drive to work, didn’t heat your home, didn’t visit a doctor, didn’t buy a house, didn’t buy insurance of any kind, didn’t have a child in college and didn’t pay state or property taxes, your cost of living agrees with the governments. The dollar has declined 4.8% per year for the last 7 years, that’s the deflation of the currency, the real inflation number.

If your using government statistics for your investment decisions, you’ll substitute cat food for hamburger when you retire.

Since the Feds creation there has been deflation – deflation of the currency. It shrinks on average 2.5% to 3% per year.

Prices will be lower for every thing that can be manufactured in China or serviced in India.

Prices will be much higher for what can only be made in the US; medical care, insurance, plumbers, trash collection, raw materials, real estate, and government.

In the next 10 years, the government will lie about the deflation of the currency so, (when the baby boomers retire) their social security check will be worth half of what they anticipated in real terms.

When the Fed fine-tunes, the orchestra gets fired. All soft landings by the FED have resulted in thousands of casualties. Ever since the earth was cooling the Fed was headed by a banker. Greenscam was the first economist. Carl Marx was an economist! Now we have Bernanke a professor. He knows what’s in a book, but he doesn’t know the real world.

If you believe the Fed guides the economy you must also believe the twelve birds sitting atop the rhinoceros guide him through the jungle.

What investments will benefit from the major changes occurring in the world?

Long term interest rates are low. The FED is proposing dropping cash from helicopters if necessary. History suggests this might be a good time to be a borrower or at least have a short duration to your interest bearing investments.

The equity market now has 84 million individual investors. Over 50% of these investors liquid assets are in the equities, the historical average is 25%. Using the rules outlined by Graham and Dodd such as dividend yield, PE Ratio, price to sales ratio and price to assets, stocks are very expensive. They are over owned and over priced – a dangerous combination.

Who’s recommending increasing equity exposure? Kudlow and Cramer –


which is a marketing program. It should be listed in the TV guide as paid programming like George Forman’s cooker. CNBS is yor direct line to dumb money.

Who’s recommending caution and much lower returns from stocks going forward? John Templeton, Carl Icahn, Allen Abelson, Mark Faber, Bill Gross and Warren Buffet to name a few. Buffet currently holds $45 billion in cash. He must be having a tough time finding those bargains from Omaha.

I expect a moose market, not a bull or a bear but a moose, rhyming with the period of ’66 to ’82 where the market went nowhere.

I believe the paper bill market has ended and the stuff bull market has begun.

Between 1966 and 1982 equities gained nothing while the GNP gained 330%. The DOW went from 1000 to 875. From 1982 to 2000 the GNP gained 170% and the DOW rallied from 875 to 11,700. Currently the DOW is trading over 13,000, about a 25 PE. Between now and 2015 if the GNP gains 100% and earnings gain 100% the DOW could be at 10,000, trading at 10 times earnings. During the past 7 years the S&P is up a total 5%. And at that rate of compounding, you will have to work till you die.

During the last stuff cycle equity mutual funds were in a dead zone while stuff; raw materials, art and real estate had super returns.

In 1966 oil was $2.90/barrel and rallied to $28/barrel. Gold was at $35/oz and rallied to $850/oz. The average price of a home increased 180%.

In 1982 the stuff cycle ended and the great paper cycle began. In 1982, the public had 14% of their liquid assets in equities. The Business Week Magazine cover reported “The Death of Equities”. The PE ratio was 7. Stocks were dirt-cheap and stuff was very expensive. Brokerage firms were selling real estate and oil and gas partnerships. 1982 was the beginning of a great bull market in paper.

By 2007 the DOW was up over 14 fold. The cost of one dollars worth of earnings (the PE ratio) has risen from 7 to 25, and the public had 57% of their liquid assets in equities. The Time Magazine cover featured “The Committee To Save The World: Greenscam, Summers and Ruben”. Brokerage firms were selling tech and dot coms with no earnings. The paper bull market was ending. Paper was very overpriced and over owned. The Dow could be in a trading range, just keeping up with the real rate of inflation for the next 10 years.

Stuff, from 1982 to 2000, was in the dead zone. Oil went from $28/barrel to $26/barrel. Gold went from $850/oz to $280/oz. The average price of a house had increased 1.2% per year by ‘2000. Stuff was a bargain.

Since 2000, the S&P is up 16.4% adjusted for government reported inflation, it’s down 2.4%.

In the next 10 years paper could be a trading market while stuff is in a bull or buy and hold market.

Change is a way of life. You either accept changes or make changes.

Capitalism is sweeping the world.

Capitalism is easy to understand. It’s nature with a balance sheet. If you’re wrong, you go broke instead of being eaten.

Three basic things make up an economy; labor, natural resources, and capital. There is a surplus of well educated labor and paper currencies.

30 years of restrained and neglected natural resource supply is being overwhelmed by demand.

The longer things remain stable, the more likely they become unstable.

Where might the best investments be in the future?

After 30 years of trading equities, I changed my career. Why? Creating the best stuff fund.


Today, China is booming. They have declared the national bird to be the construction crane. In the last five years china went from exporting oil to the second largest importer in the world. The emerging market countries will go from walking to bikes, to motorcycles and to autos. They will need oil and gas, chemicals, forest products and metals. At $1.00 per hour they are deflating manufacturing costs, but as they become more successful, they will throw away their bicycles and buy motorcycles and eat better, increasing the demand for raw materials.

China and India are transforming their economies from poor agrarian nations to the newest industrial powers, replete with heavy industries, mass transportation and higher education. Rising from these giant new economies will come millions of new consumers, the very people who are already straining the natural resources of the earth.

In 1900, the US started to industrialize. We were using one barrel of oil per person per year. By 1970, we were using 27 barrels per person. In 1950, Japan started to industrialize, they were using 1 barrel per person. By 1970, they were using 17. In 1965, South Korea started to industrialize. They were using one barrel per person per year. By 2000 they were using 17. Today, China uses 1.3 barrel per person per year and India uses .7. China currently has 168 power plants under construction. Copper probably won’t go down much.

In 1950, Japan per capita income was 18% of the US, today it’s 96%. In 1965, South Korea’s per capita income was 16% of the US, today it’s 56%. India and China have 2.5 billion consumers, 9 times the US. The US uses 25% of the world’s energy, China and India use 4%. India and China have 280 people per car. The US has 2 people per car. Last year, China produced and sold the same number of autos as the US. Eighty percent were purchased with cash.

Real incomes are just beginning to rise to levels that create large demands for consumer goods. Between 1950 and 1970, Japan’s urban population increased 70%. Personal consumption increased 600%.

China currently is 40% urban, 60% rural. The US is 97% urban and 3% rural.

China has 20% of the world’s population and 7% of the world’s land. China’s grain imports will grow from 14 million tones today to 57 million tones in 2020.

Today, 1 billion people consume two thirds of the world’s raw materials. 5.6 billion people consume the other third and they are becoming more successful. The industrial revolution involved 300 million people. The emerging nation revolution involves 3 billion.

There is no need to connect the dots, they over lap.

Lead times to create raw materials are measured in years. In Canada $80 billion in infrastructure has been committed to production of the tar sands. The goal is to produce 3 million barrels a day by 2015. At $75, oil is a bargain liquid. It costs 10% less than bottled water, it’s one third the cost of milk, one fifth the cost of beer and only 2% of the cost of Jack Daniels.

Phelps Dodge is planning to open a new copper mine in 2007. It took 12 years of paper work to receive federal approval.

In China:
Company - “we found copper.”
Government - “start digging. What can we do to help?”
Company – “We need a road.”
Government – “You got it.”

China’s growing at 10%, the US at 2%. Money goes where it’s treated well.

Currently oil companies who search for oil at great risk earn 9 cents per gallon. Government, at no risk takes 51 cents per gallon.

In the US, half of our energy problem is government regulations. The only place oil companies are allowed to drill for oil is next to a dry hole. The only place you can build a refinery is no where.

The political systems of G-7 are at a great disadvantage, stuck with unfunded liabilities and debt. Current politicians are unwilling to cut spending growth. If your rich in G-7 you are attacked. In china to be rich is glorious. The Chinese have a 40 percent savings rate and 1.2 trillion US dollars to purchase assets with. 1.2 trillion is 12,000 billion dollars, IOU’s to purchase real assets with.

Demand for raw materials has increased. In many cases, the capacity to produce raw materials has declined dramatically in the last 20 years. Tops and bottoms are creatures of extreme. Markets rise above all expectation and then go higher and then fall further than common sense suggests. The most desirable investments for the future might not be in cyber space but back to the basics.

I believe we are only at the start of the largest bull market in history for raw materials.

By the end of this bull market, there will be a bounty on caribou, you will be able to see an oil rig from every beach and they will be digging a coal mine in Al Gore’s yard.

As you climb the ladder of financial success, check to make sure it’s leaning on the right wall. I believe raw materials will be one of the best investments for the next 10 to 15 years.

Long-term- the future is very bright because man has been succeeding in bringing about change for the better since he or she first emerged from the cave. Big problems usually disguise big opportunities.

Governments and central banks are completely incapable of keeping tomorrow from coming.

In the next 12 months, let the winds of change fill your sails. Don’t just look at the stars – be one.

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Last week, the market tried to recover from the 350+ point Dow Jones drop on Friday. That first round of earnings featured financial stocks and their big write-downs spooked the market. As I mentioned in last week's commentary, I felt that the market would stabilize this week once a broader mix of earnings were released.

Through the course of the week we caught a performance glimpse from many different groups and sectors. The news was good overall and the guidance was decent. If you strip financial stocks out of the earnings picture, corporations have posted a 3% growth rate. That is much better than the flat earnings growth rate has been projected. The market found its footing and about one third of the companies in the S&P 500 have reported.

Next week is the “grand daddy” of all news weeks. We have an FOMC meeting, the Unemployment Report, and the busiest week of earnings releases. I believe the Fed’s dramatic action during the last meeting will give them a "free pass" this time around. They have made it clear that they are carefully monitoring economic conditions and they will do what it takes to keep us from going into a recession. Many analysts are looking for a .25% rate cut. If they don't get it, I feel the market will be accepting if the news includes dovish rhetoric. The dust will settle for a few days and the market will wait for the Unemployment Report. If we do get a rate cut, we will be off to the races.

Last month's employment figures were much stronger than expected. With the exception of the August number, the market has been able to rally after every Unemployment Report this year. I believe the employment picture is sound and the market will rally after the number.

Microsoft has been a dormant stock for many years and on Friday it staged a major breakout. It is a mega cap stock and it could lead the sector higher if it wakes up. Tech has been relatively strong recently and the sector could lead the market higher if the earnings continue to beat. The QQQQ is still only half of its “tech bubble” peak. Financial stocks are weak and the market needs leadership from the tech sector if it is going to stage a sustained rally. In the chart you can see how well the QQQQ has performed. It is bumping up against the relative high and it is poised to breakout.

These are some of the earnings highlights for the week ahead: ASH, CAN, HUM, K, RSH, SCHN, ATHR, FTI, OSG, SOHU, UHS, VTRX, AMED, AVP, BJS, CRDN, CL, ENR, CMC, FPL, RAIL, GT, HLT, MGM, ODP, PG, TEVA, TRW, X, UA, BWLD, CMG, DWA, FIC, GPRO, IVGN, LNET, MCK, RTI, PCU, WBSN, CCJ, CRS, GRMN, KFT, COL, SPW, RIG, WY, ANDE, ABX, XRAY, FMC, MTW, PHRM, TK, AGU, AZN, BDX, CAM, CVS, DNR, XOM, GTI, IGT, MRO, PCS, OSK, ROK, TBL, UTHR, WMB, CLF, CROX, CYTC, ERTS, GES, OII, WLT, WDC, CVX, EDS, IP, OMG, TLM. I see more good than bad in this list and the numbers should have a positive influence on the market.

We are headed into one of the most bullish periods of the year and I expect a year-end rally. Given all of the news next week, the market will find a catalyst to push it to new highs. End of month buying will also help to support prices.

Monday, October 22, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

With the exception of financial stocks, most sectors have been beating expectations. Financials are not some small little part of the overall market; they comprise 20% of the S&P 500. Last week was laden with earnings releases from national/regional banks, mortgage lenders and brokerage firms. This week, we will see a much greater mix of earnings.

SLB posted nice earnings and it was down by more than $12. In fact, all of the oil stocks were hit hard Friday. Oil is near $90 and that might become an issue for the market. I still believe that energy is one of the best investments and once this pullback stabilizes it will present a great buying opportunity.

CAT posted a 21% increase in earnings; however, they lowered guidance for the next quarter. They painted a very weak picture for domestic construction. Last week housing starts fell to a new 14-year low and the Beige Book indicated weaker economic conditions across the nation.

The dollar continues to drift lower and it is making new 30-year lows against most major currencies. This will eventually translate into inflation and that will put upward pressure on interest rates.

After a day like Friday, it is easy to focus on the negative issues. I believe we could see continued weakness for the next week or two that tests some of the major support levels. The last few days of October mark the beginning of the strongest bullish seasonal pattern of the year. I believe we will work off the worries and rally into year-end.

The economic numbers are very light this week. Durable goods orders, new home sales and Michigan sentiment are the only scheduled releases. Obviously, durable goods orders are the most significant release since they reveal our appetite for big-ticket items.


They are in chronological order so that you can follow along as the week progresses. The current estimates are for flat earnings growth. I believe that will be an easy hurdle to clear. Corporate guidance is the key as traders look to the future. By the end of next week we will have a much clearer picture.

Corporate earnings have been strong, the unemployment rate is low, interest rates are low, tax rates are low, inflation is in check and global expansion is helping us through this rough patch. All of these conditions might be on the brink of changing; however, I don't believe that they will deteriorate before year-end.

I am patiently going to wait for support to be established and then I will buy this dip. I do not want to try and short this market for fear that I will get caught in a whipsaw. I got caught short last March and I learned from my mistake. In August, I bought into the weakness and took profits during the snap back rally.

During the last 3 quarters, the first week of earnings season has started off poorly. I expect a better week ahead.

Editor's Note: To take advantage of our high performance Options Trading Service (HOTS), click here.

Friday, October 19, 2007

Market Timing

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Fari Hamzei

I wrote a piece for FOX biz channel around 830 am PDT this morning, about my reasons why DOW should close about -350 to -500 today. Robert Gray, formerly of Bloomberg TV, quoted us near the close.

As a service to our loyal readers, here are my bullet points (part of these points were posted in our SuperPlatinum Virtual Trading Room in real time). Tomorrow in our Saturday Class we will explore these crucial issues in more detail.

1) expiration week is a counter trend -- we have been climbing a wall of worry since Aug 16th -- SPX hit massive resistance at MR1 Level (Monthly Resistance Level One) five times between October 8th and 15th and failed. We've had divergences between SPX and NDX at new highs with their respective cum advance decline lines -- see our Timer chart below.
2) Crude Oil is at ~85 to 90 USD per barrel.
3) Benazir Bhutto returning to Pakistan -- I wrote about this in early Aug on our Blog -- they have 40 confirmed nukes -- AQ is HQ'd there.
4) comrade Paulson putting his foot in his mouth on SIVs.
5) dollar trashing by Uncle Ben via pre-mature easing.
6) DJ Trans telegraphing massive slow down of the US Economy. See our Wyckoff Chart below.
7) 20th anniversary of Black Monday falling on October Expiration Day.

Have a great weekend......

Saturday, October 13, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Last week a stable Employment Report was released and the market surged higher. Despite mixed earnings announcements and soft economic releases, the market was able to add to those gains throughout the week until Thursday afternoon. "Hawkish comments" from one of the Fed Officials spooked the market, creating an intraday reversal. Chinese stocks were hit hard along with other stocks that have recently posted big gains.

Friday morning, the “all clear” sign was given. Chinese stocks held firm overnight and the PPI and retail sales numbers came in better than expected. The market was able to bounce and it closed above the highs made a week ago.

The economic releases this week are: industrial production, CPI, housing starts, LEI and Philly Fed.

I believe the earnings guidance, not the economic news will drive prices during the next few weeks. They are forward looking as opposed to the hindsight provided by economic releases. If GE and MCD are any indication, the earnings should come in at or above expectations. Both posted solid results.

Next week we will get an onslaught of earnings releases. I expect most companies to meet estimates and the current projected growth rate year-over-year is flat (0%). I believe that threshold will be cleared easily. The wild card is the earnings guidance that corporations will provide. If future weakness becomes a theme, the market will decline. If the earnings and guidance are consistent with the market's expectations, the market will continue to push higher.
These are some of the companies that are announcing this week: C, ETN, DNA, JBHT, JNJ, USB, WFC, INTC, STX, YHOO, ABT, MO, CIT, KO, ITW, JPM, UTX, ALL, EBAY, ILMN, ME, SYK, BAC, BGG, NUE, PH, PFE, RS, STJ, UNH, AMD, CREE, GILD, GOOG, IBM, ISRG, SNDK, TPX, VFC, MMM, CAT, HOG, HON, SLB.

We are only two weeks away from a seasonally bullish period. The earnings releases have been decent, we have not had many earnings warnings and the economic releases have been positive. As long as Americans have jobs, they will continue to spend and pay their debts. Add the Fed's half point interest rate cut to that equation and you can see why I am bullish. As long as the SPY is above 150, we will trade from the long side.

Editor's Note: To take advantage of our high performance Options Trading Service (HOTS), click here.

Friday, October 12, 2007

Equity Index Update (Special Edition)

Equity Index Update (Special Edition)SocialTwist Tell-a-Friend
Brad Sullivan

The index markets suffered through a sharp decline in the afternoon trade after a JP Morgan analyst cut revenue estimates for the Chinese Internet company BIDU ( The stock plunged from 358 per share to 303. Other staples of the momentum side also slid as GOOG dropped from a new all-time high of 641 to 622 on the close…AAPL fell sharply as did DRYS. The NQ market participants were clearly caught off guard as the index cratered from 2210 to 2160 in 30 minutes of trading…the subsequent bounce proved short lived and another round of selling pushed the index to the session lows of 2146 a solid -2% drop for the afternoon from high to low.

The interesting aspect of the decline was the second wave of selling. It was during this wave that the broader market came along for the ride on the downside…GS gave back its entire session from Tuesday’s FOMC minutes rally and the stock settled at 229. The examples of this type of price action were found everywhere by the close and one has to wonder if a confluence of forces that have been the underpinning of this rally (global growth, commodity boom, no inflation…so on so on) is being rethought. Certainly, a one day reversal should not cause a top in this long running bull market…and for the bears hoping that we have finally turned the cards over to the “sell” side of the ledger I would advise caution. There needs to be more technical work done on the downside in order to generate a price ceiling of significance. In the short run, it would appear that a rally back to yesterday’s highs would be a stretch. So…where does that leave us?

From a day trading perspective, much of the move was accomplished (at least in terms of velocity and price discovery) in yesterday’s swoon. The SPZ went BELOW the September Employment Report session low (1558.25) and some mild sell stops pushed the index to session lows of 1556.25. However, this low was still HIGHER than the GAP left from that very Employment report (1552.25). The subsequent short covering bounce into the close pushed the index towards 1565 – that close is on slightly lower on the week and does not represent the low close of the week as that was accomplished on Monday at 1562.75. In fact, only the NQ and ER2 contracts closed at new weekly lows. Essentially, this boils down to patience and a little bit of reality. Yes the markets are overextended and the fact that a revenue downgrade of a Chinese Internet company could put so much pressure on the marketplace proves that point. However, to make the leap from the trade in BIDU to an overall slowing of the China Story may be a bit of a stretch. In my opinion, we witnessed a rare news event that led to a bit of a buyers strike. Whether or not that continues today will be fascinating, particularly as we head into earnings season. My advice is to lay low and look for a few opportunities, particularly early, for selling rallies. Psychologically the market took a hit and some of that should carry into today.

Random Comments

Random CommentsSocialTwist Tell-a-Friend
Fil Zucchi

I will refrain from too many comments on the nasty reversal we saw yesterday, since there are far smarter technical eyes in this community than me. Rather, a few thoughts on specific names and areas:

  • Keep a close eye on the Baltic Dry Index (BDI) and its proxies, companies like Paragon Shipping (PRGN), Quintana Marine (QMAR), and Dryships (DRYS). In my view they reflect better than anything else the true state of the world tangible economy; and in hindsight I believe they will be seen as the telltale sign of coming runaway inflation. Since July the Index has gone parabolic, with dry bulk shipping rates going through the roof, and there’s anecdotal evidence that the flipping game that spread from stocks, to homes, to commercial real estate, has now infected the “vessels” asset class. Yesterday’s break in these stocks arrived after several days of vertical moves on massive volume. If the BDI follows the stocks breaks, you can kick one more leg from under the broader market.

  • Chatting with folks very close to distressed-debt vulture funds, the consensus is that the weaker of the major homebuilders, Tousa Inc. (TOA), Standard Pacific (SPF), Beazer Homes (BZH), and perhaps even Hovnanian (HOV), would be better off filing for bankruptcy sooner than later; the theory being that there is no way out for them anyway, and at least right now they have enough assets left to effectively reorganize, and the economy is not in recession (yet). If they wait until things really turn ugly fresh capital will be much more expensive.

  • With respect to the last point however, one daunting question is how many multiples of the bonds’ face values are the outstanding CDS against such debts? And where is that time bomb hidden?

  • Corporate bond watchers and equity players are having a heated debate as to whether the recovery in the debt markets of the last couple weeks will set off another wave of M&A, LBO’s, and buybacks. We are already seeing the buybacks, and strategic M&A. In my humble opinion, and based on anecdotal conversations with folks at major PE groups, LBO’s are done and they are not coming back (corporates traders disagree). Debt fueled buybacks have been as consistently successful as flipping a coin: just look at Intel (INTC), Dean Foods (DF), Amgen (AMGN), St. Jude Medical (STJ), not to mention a bunch of the homebuilders. That leaves strategic M&A, where premiums are not likely to be nearly as fat as they were in LBO’s.

  • The last time the Dollar Index (DXY) touched current levels it reversed and shot higher within two weeks. This is week two since the break of the 79 level and any semblance of a bounce is still AWOL. I may end up eating my words (wouldn’t be the first . . . or tenth time), but in my opinion the greenback has at most two more weeks to mount a rally or the next move down will start getting tagged as a “currency crisis”. Of course with M3 ramping at 14% in September and gold and oil going relentlessly higher one could argue that the currency crisis is already here.

  • On a slightly more cheery note, if one has to be long something, I continue to think that small regional banks with little mortgage exposure should benefit from the steepening yield-curve. The RKH Holder is a lazy way to play this. Also, not a day goes by that I don’t find an article concerning the lack of bandwidth in the metro networks and at the switching nodes. Away from the ne’er do wells – Alcatel-Lucent (ALU), Nortel (NT), Tellabs (TLAB) – I think there are tremendous opportunities, especially in software rich companies. Favorites include Ciena (CIEN), Infinera (INFN), F5 Networks (FFIV), Akamai (AKAM), and Limelight Networks (LLNW); once the cable guys finally decide how to avoid getting run over by the Bells FTTP deployments, and they start formulating their capital spending (which is inevitably coming), other viable names will be Ceragon Networks (CRNT), Arris (ARRS), Harmonic (HLIT) and BigBand Networks (BBND).

    And always know where the “emergency exit” is!!

  • Friday, October 5, 2007

    Bull Run in the Silver and Gold Index (XAU)

    Bull Run in the Silver and Gold Index (XAU)SocialTwist Tell-a-Friend
    Tim Ord

    The $XAU chart above dates back to 1985. At the bottom of the chart is the Price Relative to gold Ratio (PRTG). PRTG ratio measures the premium or discount the $XAU is selling against gold. This ratio identifies when gold stocks are cheap or expensive compared to the yellow metal gold. When PRTG ratio is near .20 or below then gold stocks are out of favor and cheap and at a good buy. When PRTG is near .30 range or higher then gold stocks are in favor and expensive and near a high. The time to buy gold stocks is the transition from cheap heading to expensive. To identify this buying zone, we have drawn a red trend lines connecting the highs on PRTG and where PRTG has exceeded those downtrend lines and have triggered buy signals. These buy signal on the monthly PRTG ratio where triggered in early 1993, late 2001, early 2003 mid 2005 and in the last couple of months a bullish crossover has occurred and has triggered a buy signal and the buy signal is still on going. Even though a “Shakeout” did occur in August of this year the month PRTG buy signal remained intact. Therefore the bigger trend is up.

    Above is the Breadth statistics for the HUI as of the close yesterday. We keep tabs on this study because its giving good insight of what is going on the HUI index. The bottom window is the % of stocks above its 50 day moving average. When this percentage is near 0% the market is near a low and when near 100% the market is near a high. The next window up is the % of stocks above its 10 day moving average. Again the same percentages work the same way. When both the 10 DMA and 50 DMA are both at extremes (either near 100% or 0%) the market is near a turn and head in the opposite direction. We have circle in blue where the 10 DMA and 50 DMA where near 100% and helped to pick out the highs in the HUI. Recently both the 10 DMA and 50 DMA turned down near the 100% range and suggest the market was near a short term high. The HUI tested the previous high of 9/21 and the McClellan Oscillator was far below its previous high and a negative divergence similar to the negative divergence at the previous highs on the HUI. The negative divergence on the McClellan Oscillator helps to confirm the 10 DMA and 50 DMA for a short term top. We have support coming in near 160 on the XAU and the next support below that is the 147 range. We will be watching these areas for a bullish setup on the XAU. Also on the last COT (Commitment of Traders) report, the Commercials have back off its bullish stance and now are short term bearish. Also Seasonality for Gold in the month of October is bearish.

    Therefore they may be a pull back this month but the pull back should be bought. We have support coming in near 160 on the XAU and the next support below that is the 147 range. We plan to go long the XAU on the next buy signal.

    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.

    Sunday, September 30, 2007

    HOTS Weekly Options Commentary

    HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
    Peter Stolcers

    This week the market fell into a very tight 30 point trading range on the S&P 500. In the absence of news, light directionless trading set in. The economic releases came in slightly better than expected, but everyone knows they are hindsight. It is the future the Fed is concerned about.

    This same scenario will unfold next week during the first four days. The economic releases are very light and they include the ISM numbers, building permits and auto sales. PEP, WAG and RIMM are the only earnings worth mention.

    The fireworks will let loose on Friday with the release of the Unemployment Report. The weak number last month paved the way for the Fed to lower interest rates. If there is an increase in unemployment, the market will have a negative reaction. On the other hand, solid employment could prove that last month’s decline was an aberration. If this unfolds, the market will make a run at the all-time high.

    I still suspect that the market is headed higher. Global growth is fueling our economy and housing only makes up 5% of our GDP. Earnings are right around the corner and we have not had an earnings warning outside of the home building sector. BSC and LEH were supposedly “exposed” to sub prime and both posted decent results. As companies release earnings, their guidance for next quarter will have a tremendous influence on the market.

    This market can swing either way. While we wait, we will stay balanced.

    Editor's Note: To take advantage of our high performance Options Trading Service (HOTS), click here.

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