Examining The Leadership In Today’s Rally

I mentioned on Friday when I was hosting “The MoneyMan Report” on the Biz Radio Network that it wouldn’t surprise me to see a few up days.  Perhaps even getting back 250 points of the 500 lost last week in the Dow.  The S&P 500 stopped going down right at its 50-day moving average as well.  So, the technician types think that’s a logical place to buy.

The question is what would be the quality of that rally.  Now, we only have one day to examine this.  Today.  But, looking at the internal data of the rally today, it was the same thing that we’ve seen for several weeks.  Extremely low volume and the rally appeared to have happened just because the sellers paused.  Then, it gets to a certain level and in come the short sellers like the huge reversal last Monday.  I sold a lot of positions last week and I’m moving more towards net short than I’ve been in a while.  I will continue to not only sell into weak rallies but add to my short ETFs that I’ve been holding for a while.  They had a fabulous week last week.

Looking over some of the leaders today, it was homebuilders, semiconductors, airlines, and recreational vehicles.  The losers were energy, agribusiness stocks & gold.  Are we really supposed to believe that the leaders for this decade are done going up and losers such as homebuilders and airlines are going to lead us higher?  Recreational vehicles?  Are you kidding me?  I live near a huge dealership of RVs and I just shake my head watching that inventory just sit there baking in the sun.  How many of these are they selling right now?  To me, this rally today looks like profit taking by investors with big winners in energy and bottom fishers saying “homebuilders and airlines have to be a good deal at these prices”.  Sorry, I’m not buying it.

By the way, in contrast to slow RV sales,  I was in the Apple store in San Antonio this weekend buying a new Imac and I asked the sales guy were all those people in the store just looking or were they actually buying?  He said that store alone has a budget of selling 50 new computers every day.  Not Saturday and Sundays, but 7 days a week, 50 per day.  That doesn’t include the Ipod sales, the Iphone sales, and so forth.  Wow!

Winnebago Industries (WGO) has fallen from $37.50 to around $14 since the beginning of 2007.  Apple Inc. (AAPL) on the other hand has gone from $75 to $185 during the same time frame.  But, I’m supposed to believe that the market’s going to rally further with leadership from Winnebago (WGO)?  Looks more like reversion to the mean.

You really have to roll up your sleeves and examine the rally or pullback every day to see what’s really going on to be successful in this market (or any market for that matter). 

 

A Little Fear

I’m attaching an updated picture of my Crazy Investor Indicator which shows up until about a week ago, we had maximum optimism.  Rarely does it get to this giddy level.  With the sell off in the last few days, the S&P 500 is now back to where it was in mid April.  A whole month of gain wiped out in just 4 days.  As you can see from figure 1, the fear has picked up some but would have to go up quite a bit before we got to a point of maximum fear.

Fig. 1

For those of you that have been patient with your shorts and not jumping on all the hot stuff, you’re being rewarded.  The internals have been weak for some time and with all the extreme optimism, a sell off was inevitable.  I will caution you today that the volume is extremely low due to the holiday on Monday.  Even so, 86% of all the volume is down volume.  Not many places to hide out today.

This morning I reached my sell threshold on a few more stocks.  This could be a dip on the way up but with all the internals being as negative as they are, I continue to be cautious.  Live to fight another day. 

Stops Triggered

This is a pretty weak rally attempt.  I thought after going down 400 points in two days, we’d be up maybe 50-70.

I let go of a few holdings today even though I didn’t want to.  You have to stick to a discipline.  I got stopped out on my energy trusts and my shipping stocks.  Keep in mind I don’t like to use specific price stops but rather conditional stops based on several parameters. 

The shipping stocks may continue to come under some pressure based on a report from bloomberg:

Commodity-Shipping Stocks Slump on China Iron Ore Speculation

2008-05-22 11:41 (New York)

 

 

By Alaric Nightingale

     May 22 (Bloomberg) — Commodity shipping stocks had their biggest decline in more than two months as ship-hire rates fell on speculation Chinese steelmakers will start using record iron ore stockpiles.

     The Bloomberg Dry Ships Index slid 5.2 percent to 5,606.82 points as of 4:38 p.m. in London. A close at that level would be the biggest one-day drop since March 17. Ship-rental rates, which climbed to a record on May 20, fell today by the most since April 2, according to prices from the London-based Baltic Exchange.

     The Baltic Dry Index, a measure of commodity shipping costs on international trade routes, dropped 1 percent to 11,648 points today, according to the Baltic Exchange. It climbed to a record

11,793 points on May 20.

     “China’s restocking of iron ore has been a key driver for significant rate increases we’ve seen lately,” Erik Helberg, an analyst at Pareto Securities ASA, said by phone today. “If that trading slows down, it will have a negative impact on the market.”

     Investors may be “taking profit” after the China Iron and Steel Association said yesterday the nation’s steelmakers must curb speculation in the iron ore market, Helberg said. The National Development and Reform Commission, the nation’s top planning agency, said today that ports should raise storage costs to discourage iron ore hoarding.

     Credit Suisse Group today downgraded Asia’s dry-bulk shipping sector, citing China’s plans to reduce its inventories and the possibility Brazilian iron ore ports will close to clear congestion, freeing up ships.

     Some shipowners may consider cutting prices in case the Chinese announcements do curb vessel demand, Helberg said.

 

 

 

 

Where’s Gold Going

I’ve been getting comments regarding my thoughts on gold and where it’s going.

I had written a couple of months ago I though gold would go down to $830.  It went to $850 and then bounced only to fall to $830 in late April.  At that point, I was saying I’d short into any rally for the medium term.  I still liked gold long term.  Well, after hitting $830, we did get a rally up to about the $870 level but I didn’t short but was still negative.  Over the past 6 trading sessions, gold has gone from $850 to around $925 per ounce.  I must admit I didn’t see this move coming.  I thought we would continue to drift lower and continue to make lower highs as it had the previous few months.

So, now that it’s broken its almost 3 month downtrend, where’s it going from here?  It’s basically in a spot that I wouldn’t take a position.  It could have reached a double top around the $930 range.  This has been a big move recently.  It could easily come back to $870 and then continue up.  If it’s in a new downtrend, then it should start now.  For now, I wouldn’t take any position.  However, I will keep you updated on exactly when do take that position.  (I’m starting to sounds like a politician)

 

Breaking Down?

Over the past several trading sessions, I’ve been negative on oil as several indicators were telling me it was getting extended.  When this happens and an investment keeps going up anyways, that tells you how strong it is.  I said I was negative but wouldn’t short it.  This is exactly why.  Rarely have you been rewarded shorting oil lately.  In addition, there is a lot of skepticism on oil prices by the smaller investor.  The more people doubt it, the higher it’ll go.  It’s like a freight train.

Perhaps $134 oil is the tipping point.  It seems in the past two days, investors don’t believe we can sustain a reasonably growing economy with oil at $134.  Who knows.  I think the market falling is more a function of it’s simply ready to go down.  It’s been going up on weak internals and extreme optimism.  It went up further and longer than I thought. 

The Dow’s down around 200 today and the volume is a little heavier than we’ve seen but still very low in comparison to a few months ago.   We have about 80% downside volume today.  Technicians are watching the S&P 500 fall below its 20-day moving average.  If this up market is the beginning of something bigger, the S&P 500 should only give back half of its gains since the March lows.  That would be around 1350.  I believe it’ll be something bigger and we’ll drift down over the next few months until investors are frustrated enough to give up on stocks. 

So what’s strong today?  What else, energy and gold.  Enough said.

By the way, for those of you in Houston, I’ll be in town next week at The Museum Of Natural Science along with Mike Norman, Daniel Frishberg, & Del Walmsley.  For more information, click on http://www.bizradio.com/home.php?p=HMNS

 

Tight Stops Please

We had the midday reversal yesterday and the selling continues.  At 1:50 p.m. CST, we have the Dow down over 200 points.  We’re only seeing strength basically in commodities.  Gold, silver, oil, natural gas, and agribusiness are all strong today. 

Make sure you have a sell strategy in place if you’re long right now.  You need to physically go through every stock, mutual fund, or ETF that you own and establish a sell point.  I don’t like using physical price stops.  I use conditional stops.  They could be technical places.  Or, in most cases, I see what technical indicator has worked the best for each stock and use that indicator.  If that particular indicator turns negative, I sell.  If you don’t have time to do that, place a 3% stop or so underneath all your positions that aren’t long-term holdings or hedged.  As I get stopped out, I will probably go net short.

The market can erase a couple of months worth of gains in just a few days.  I’ve seen it happen.  So, your strategy needs to be put into place now so you’re not staring into the headlights like a deer.

The fear is picking up a little today but still way too many people that are bullish.  Be careful.

Big Reversal

At midday, the Dow was about 13130.  Volume was low (nothing new there).  I came back from lunch and the Dow was only up about 60 points.  The Nasdaq actually went into the negative territory (down around 20 points).  I noticed a huge reversal in the shipping stocks.  Those have been on a tear.  I currently own Diana Shipping (DSX).  It was over $41 this morning and started falling on heavy volume and is now down over $1 for the day at $38.

I don’t see anything specific that would have caused this reversal.  This kind of reminds me of those midday reversals after the market’s been going down for a while.  Bottoms typically reverse for no reason and when nobody sees it coming.  That could be what we’re seeing here.  A midday reversal for no reason on no news.  I’ll continue to sniff around to see what caused this.  Perhaps nothing.

Still holding shorts, longs, & cash.

Speculation In Oil? Who Cares?

With traded commodities, the question is always how much is demand and supply and how much is pure speculation?  Oil set a new record today almost touching $128 per barrel before settling back a little.  Should oil really be $70 based on the demand and $58 is speculation by investors driving up the price?  Or, is the speculation only $10 per barrel.  Is China hoarding oil?   

To tell you the truth, I don’t think it matters.  Nobody knows and everybody has an opinion.  I’ve been spending the week try to find different ways to invest in energy in general but have the best exit strategy.  You can’t go into any investment that has doubled in the past year and just buy and hold.  Many investors bought into tech stocks in late 1999 only to get burned a few months later.  I still believe oil is a better short than long for the short run but don’t have a position at this point.

But that leads me to something where we don’t have to worry about speculation.  The Baltic Dry Index is a combination of various indexes that measure the cost of shipping dry bulk goods from one location to another, whether it’s wheat from the U.S. to China or any other commodity.

Prices for shipping these dry goods across the world don’t go up just because shippers want to raise prices.  There has to be demand there to drive prices up.  It’s also a component of how many ships there are as well.  Less ships means higher prices.  In any case, you can see in fig. 1 that late last year this index dropped by about 50%.  It’s since recovered and is off to new highs.  I’ve also shown the correlation the dry shipping stocks which are extremely correlated to this index.  Dry Ships (DRYS) is the largest of the group.  I own Diana Shipping (DSX) shown in yellow. 

Fig.1

So, while others are trying to figure out why oil is going up and when will it come down, let’s trade some stocks that give us an easy template to follow whether the stocks are good or bad to own.  By the way, the fact that this index is at all-time highs is very good.  This shows the global economy is doing just fine.  In fact, if you dig around, you’ll notice stocks that are near their all-time high have a lot of exposure to developing markets.  Most of their sales come from abroad.  Even within industries such as container companies.  The ones that are struggling are have most of their business coming from the U.S.

You can monitor the baltic dry index in a few places.  I use my bloomberg machine.  You can find it for free at http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm

Have a good weekend.

Patience

The last time I saw a market very similar to this was the fall of 2002.  I’ve mentioned this for a few weeks now.  We were in a recession, the market had “double bottomed”, and was on its way up with a ton of confidence by investors.  Then, it fell almost back to its old lows when the fear spiked and we finally got that ultimate bottom that started a new bull market.

But, I was looking back today again at that time frame and noticed the S&P 500 went from 800 to 950 before it went down.  That’s a huge gain for an index.  So, it’s not unusual what the market’s doing.  If you’re cautious like I am, it’s a little frustrating at times.  But, remember that we’re watching this in slow motion.  You and I watch this stuff every day (me, every minute).  So, if something doesn’t happen in the first 2 days, it feels like an eternity.  But, just when you’re feeling like the train is leaving the station and you abandon your strategy to chase stocks that are already up, that’s usually when it’s about to turn.

So, I don’t know when the exact moment is, but nothing has changed my mind as to the danger that remains in this market.  Continue to look at the strong groups and feel free to participate and trade.  Just don’t let your guard down and don’t abandon short positions yet.  Some of those strong groups continue to be container companies, bulk shippers, solar, technology, energy trusts, etc. 

By the way, I think oil has topped for this go around.  If you have a way to short it, you can do so with a stop in place in case this strong bull market for oil resumes.  But, for a trade, I think it’s worth a short.  You can accomplish this through buying puts on USO or doing something more sophisticated if you trade commodity futures.

What I’m Seeing

It’s been a few days since my last post and not much has happened since then.  This market is like watching paint dry.  The market’s at the same place that it was on April 18th.  So, we’re coming up on a month with no real movement.  But, let’s look at what’s happened during this month. 

• No doubt investors are much more confident now.  In a bull market, that’s a good thing.  In a bear market, that’s the kiss of death.  Which one are we in?  I’d still say we’re in a bear market.  What I’m seeing is that retail investors are becoming more confident at the same time floor traders and other professionals are becoming more cautious. 
• The supply/demand picture is still negative and when we stand back and look at the market, we see that the increases since mid March have come from the sellers pausing, not tremendous new buying. 
• Volume is still very low and the quality of that volume is not what we’d like to see.  Buyers and sellers are mainly watching from the sidelines.  This shouldn’t last for long.  One side will begin to prevail.
• The advance/decline line has been moving sideways which shows that the advance hasn’t brought along a lot of stocks with it.  In other words, there are just as many stocks declining as advancing.  A lack of breadth is not healthy.
• The economy has showed signs that perhaps later this summer, it will begin stabilizing or at least moving sideways.  Nothing to write home about and we’re probably in a recession.
• Oil has gone up to $126 per barrel which can’t be good for an economy that is struggling.
• Food prices continue to soar along with other commodities.
• The presidential election is getting closer and that typically is good for stocks.

I’ve taken some profits and moved to more cash the past few days.  I’m continuing though to make purchases in areas with the most strength.  The dry bulk shippers are an example of this strength.

Sorry I’ve been sounding like a broken record but not much to report.  I’ll try to spend some more time posting on specifics rather than just broad market stuff for the short run until we see some actualy movement.