WHICH WAY THIS MARKET IS HEADED
The S&P could be
the index with the most to lose this week already dropping 14.29 this
past week—we could see a much bigger plunge to the downtrend support
line above. If the banks complete their roll over and start fulfilling
the Oppenheimer “25% further decline” prediction of last week then the
S&P will move much lower.
Financials are 21%
of the S&P and oil is another 18% for a combined total of 39%. The oil
companies are already sliding even with oil at $105 due to fears of
growing inventory levels and falling demand. Refiner capacity
utilization is down to 82.2% from a normal level in the 92-95% range
because gasoline inventories are at an amazing 15-year high. Even with
gasoline prices above $3.00--and even pushing $4.00 in some
locations--the refiners can't make any money if everybody keeps taking
the bus.
There is a huge
possibility for oil prices to collapse from their current $105 until
this excess supply gets sucked up---that means 18% of the S&P could
continue to fall on oil and 21% dragged down by financials—equals
another big S&P sell-off.
The Nasdaq
performed better than the SP-500 actually posting a slight gain for the
week—however if we closed the quarter right here it would still be down
15%. Warnings from chip companies helped knock nearly 90 points off the
highs for the week and could be a foreboding sign for this coming
earnings season.
We’ve had a big
change in the charts from a week ago—and the market internals for the
week also suggest this market has another lower low ahead of it. Volume
accelerated for the prior two weeks to top at 10.4 billion shares on
Thursday Mar-20th and has declined every single day since to
barely break 6.1 billion on Friday. New highs are not increasing--but
new lows ARE decreasing. Volume is absolutely necessary for a sustained
rally and we’re not seeing any conviction out there indicating more
downside to come.
Friday's big report
was Consumer Sentiment and it was just as bad as everyone expected. The
headline number fell -1.3 points to 69.5--one point below the
preliminary reading racking up the lowest consumer sentiment in 16
years! The headline drop was caused by a -2.3 point decline in the
expectations component to 60.1--a level consistent with what we’ve seen
in prior recessions.
The problem is weak
confidence--and especially pessimistic future expectations--cause
consumers to slow their spending driving the economy further into a
recessionary spiral. Obviously the causes remain the housing crisis,
high gasoline prices and the daily dose of negative news about
collapsing credit markets. As with so many things the news services
continued daily hammering about the impending recession becomes a
self-fulfilling prophecy.
Tax rebate checks
due out in May will likely do little to boost sentiment since most of
this money will be spent on credit card debt, gasoline or food. Many
analysts are now suggesting the price of gasoline could hit $4 or more
during the summer driving season crushing sentiment to new lows.
The biggest single
negative for the market on Friday was a strong warning by JC Penny (JCP)
reflecting consumer concerns in general. The company warned sales
through Easter were way below expectations cutting their earnings
estimates by 35% to 50-cents per share from 75-80 cents. They also
referenced the declining consumer sentiment and rising fuel prices as
factors. According to one analyst JC Penny is sitting right in the
bull's-eye for the current consumer slowdown. They operate mall based
retail stores for the lower income sector. JC Penny same store sales in
February fell -6.7% compared to analyst estimates for a decline of 1.9
percent---the stock fell about 10% pressuring the entire retail sector.
The JC Penny
warning is a reminder that we are right in the middle of warnings season
with the start of first quarter earnings just a week away. So far there
have not been any super disastrous confessions but that could change at
the click of a mouse. The key is to determine if the trend is worsening
or improving and that guidance will be everything to traders going
forward.
The coming week is
full of employment reports but the biggest question is how badly
employment has declined. We saw U.S. non-farm payrolls fall -63,000 in
February and official estimates are for another loss of 25,000 jobs.
That would be the third consecutive month of losses after one of the
longest periods of jobs growth in U.S. history. Most whisper numbers
making the rounds are pretty close to the consensus estimates so any
downside surprise is going to hit this market hard.
In addition Oppenheimer warned last week that financial firms will trade
at least 25% lower from current levels even inspite of their recent
short term rally. As we know all-too-well financials were one of the
weakest sectors after last Monday’s mid-day high.
This ‘selling the rally’ mentality suggests hedge funds were active in
adding to or reestablishing their shorts all week. If these large
traders are leaning on the market then the perceived market bottom on
the 17th will not be a bottom at all but just another low in a series of
lower-lows to come. That’s what the market is telling us right now and
that is…
HOW WE’RE GOING
TO MAKE MONEY ON IT!
The proven most
reliable way to make money in the markets is to follow a trend—and that
is exactly what both of our new plays are set to do—follow a continuing
trend lower.
Our first trade is
on a major player in the financial sector and stock-holders have been
getting out steadily since last October—and now the stock has rolled
over again. This one just hit the top of its downtrend channel and looks
to be making another trip to the bottom. With the big players shorting
the financials and this stock in particular heading south, this play
looks to be a strong downside money-maker!
Our next play is on
a stock in the beleaguered health-care industry. What was once
considered a ‘recession proof’ sector is now getting hit hard with
investors fleeing these stock like they were infected with the plague.
The stock dropped hard recently—rallied a little—and is now plunging
once again breaking critical support on Friday and setting the stock up
for new lows this coming week—lows we’ll be taking advantage of with
some well-placed puts first thing Monday!
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