The markets have recovered much of the big plunge
from two weeks ago so are we poised to continue higher or is this just a
sucker punch before the next fall? To help find out let’s take a good
look at…
WHICH WAY THIS MARKET IS HEADED
As you can see the
SPX rallied everyday this past week regaining much of what was lost the
week before. The problem from a charting standpoint is we are now
touching right up against old support/new resistance—this is an area
where stocks like to rollover and there is a decent chance we could see
that this coming week. Once that trend is confirmed the wide spread
recognition of the pattern will accelerate the breakdown.
The S&P is
controlled by its three largest sectors---financials, energy and
technology. Even though techs have been bullish recently they are not
strong enough to rescue the S&P if oil rolls over. Financials are
already in sell mode so 2 of 3 major sectors makes a majority and the
S&P should decline on falling energy.
The greatest
probability is for a fall this coming week but if the S&P breaks above
the uptrend line above—currently at 1420—then we’re heading higher. Any
breakdown from here is VERY bearish and a failure at 1375 would be the
critical confirmation point toward a new leg lower.
The Nasdaq declined
from 2551 to 2430 in the days following option expiration for a drop of
-121 points. Unlike the Dow the Nasdaq rebounded +92 points to close at
2522 on Friday. Tech stocks, primarily led by the chip sector are the
leading the rest of the markets higher which is unusual for this time of
year and suggests a longer-term bullish bias toward techs specifically
and the Nasdaq in general.
The economic news
this past week was mixed. The last reading on Consumer Sentiment for May
was revised slightly from 59.5 to 59.8 but it was still at a 28-year
low. Inflation expectations continued to rise with one-year inflation
expectations now at 5.2% and five-year inflation expectations at
3.4%---the highest levels since 1996.
On the plus side
the Chicago PMI came in at 49.1--well over consensus of 48.5. Moody's
Economy.com was predicting 47.5 and a retracement of gains made over the
last two months but the PMI surprised analysts with a four-month high.
Anything under 50 is still in contraction territory but conditions are
definitely improving, however this is the first time the PMI has been
under 50 for four months since the 2001 recession.
New orders rose
from 53.0 to 56.1 and backorders rose from 39.5 to 46.8. The employment
index jumped from 35.2 to 41.2. On the downside the prices paid rose
+4.6 to 87.5 and the highest level since June 2006. This inflation is
slowly filtering into consumer prices and it will be a problem for the
Fed. Every time these inflationary figures are released traders get
further confirmation that the next move by the Fed will be up not
down—even if that is several months away it’s still a concern.
On the personal
consumption front purchases of high dollar items like large flat screen
TVs have slowed significantly. Real durable goods spending has risen
only once in the last seven months and has fallen -3.6% over that
period. Income has slowed as the job market weakens and consumers can no
longer fall back on their home equity to make ends meet.
We’re beginning to see the stress on the consumer in obscure news
reports here and there. For example the CEO of Public Service Electric
and Gas (PEG) reported on Friday that disconnects for non-payment of
utility bills have risen sharply and payment delays are becoming
alarmingly prevalent. When consumers can't pay their utility bills they
are definitely in trouble. The CEO also said he wanted to hike natural
gas prices 20% starting in October to cover the increased cost. Prices
have risen from $7 to $11-$13 during heating season. The average
customer bill would rise +$28.60 per month which would only exaggerate
the budget stress consumers are feeling.
Next week the
economic calendar begins with the May ISM Index on Monday and
expectations are for another month in contraction territory at 48.5.
That would be flat with the 48.6 seen in April. Some analysts are
expecting a further decline to something in the 47.0 range. If the ISM
remains in the current range that would mean the low of 48.3 back in
February is still intact indicating we may have hit bottom. In April the
new orders were unchanged at 46.5---its lowest level since the 2001
recession. This will be the number to watch on Monday's report.
The biggest report
for the week is the Non-Farm Payrolls on Friday. Expectations are for a
loss of 60,000 jobs. After three months of job losses over 75,000 per
month we saw a relatively minor 20,000 loss in April. If jobs remain
negative along with the ISM then the Fed will likely remain on the
sidelines with no increase in rates when they meet in three weeks on
June 24th.
There is almost no
chance of another rate cut between what the Fed has already telegraphed
and the increasingly serious inflation numbers—all the markets can hope
for at this point is a steady rate policy until autumn at the
earliest—and that is probably what will happen.
The sectors fairing
the worst in May were the airlines at -18% thanks to $130 oil, while
banks also lost traction and fell -8% along with a 5% decline in
housing. Banks declined on fears that the Fed would be raising rates
soon and on worries about the growing borrowings at the Fed's discount
window.
Borrowing on
Wednesday hit $19.04 billion and average daily borrowings by banks rose
to $15.95 billion and a new cycle high. This suggests the banking sector
is still under a great deal of stress since borrowing at the discount
window is considered a last resort. Borrowings by primary dealers
averaged another $12.33 billion per day. Fed regulators closed a failed
Minnesota bank called First Integrity and the FDIC was appointed as
receiver. The bank was small with only $54 million in assets and $50
million in deposits but it underscored the worry about other failures to
come. This was the 4th bank to fail in recent weeks. These worries have
prompted a sell-off in financials after the Fed backed rally lost steam.
Oil has been
selling off of its 135 intraday high over the past few days but support
at $125 appears to have held--and with hurricane season officially
starting today its doubtful prices will fall much further. Hurricane
forecasters are predicting 9 hurricanes and odds are good at least one
will be in the Gulf. If it happened to head for the oil patch we could
easily see $135-$150 oil very quickly and although those prices will
help the energy sector they will hurt everything else. Time to start
shopping for that little four-banger to get you around town—or maybe a
bicycle the way things are going.
By the way tropical
storm Arthur formed off the coast of Belize on Friday and appears headed
to the Mexican side of the Gulf this week. Expect oil speculation to
ignite very soon.
The bottom line is
there are still plenty of economic concerns out there and a recession
may be hard to avoid especially if the high cost of oil continues to
drag the rest of the economy lower. Transportation costs are a huge part
of commerce and if you’ve tried to have anything shipped lately it’s a
real eye-opener. You take everything together and the only thing holding
the US markets up right now are burgeoning over-seas economies fueling
our big multi-nationals—let’s hope those countries don’t take a
rest!
So we’ve got
manufacturing in contraction, consumerism at a multi-year low, oil
temporarily pulled back into launching position and a market that has
actually traded higher for the past four days in a row—the question is…
HOW DO WE MAKE
MONEY ON IT?
We’ve got two
high-potential plays lined up this week—one bullish and the other
bearish.
Our first play is
bullish and it’s in the one sector that has been consistently trending
higher the entire year—energy. This particular stock is the leader in a
certain sector of energy that has been on fire lately with demand
rocketing from markets all over the world. On top of some amazingly
compelling fundamentals—like a doubling of earnings projected for
2008—the stock has just set us up with a super high potential bullish
pattern—one we’ll be buying calls on first thing Monday morning!
Our next play is
bearish and it’s on an index that has the weakest chart of every major
index out there. This one is absolutely ripe for a rollover and by the
looks of things our timing couldn’t be better. The really good news is
just a tiny percentage downward move on this one will add some super
profits to our bearish position—a position we’ll be getting on board
immediately!
We’ve got two super
high potential plays lined up and a market ready to rock and roll—so
let’s get to it…
For more information on everything you receive with your Pearly Gates subscription click on
Cashflow Heaven.