WHICH WAY THIS MARKET IS HEADED
As you can see the markets got hit hard last week.
So hard in fact that in spite of some increasingly damaging fundamentals
both charts have a good chance of bouncing higher this coming
week—remember nothing goes up OR down in a straight line and these two
are due for a little relief.
That said there are some powerful reasons this
market is falling and if we do get a boost this week the best way to
handle it is to take some super short positions the moment it starts to
rollover.
This market is falling for a multiple of reasons
but there are two that are creating more downside force than the rest
put together—a deteriorating situation in the financial markets and out
of control oil prices.
First the financials--the
credit crunch has come back with a vengeance like the guy in the horror
movies with the hockey mask that refuses to die. On Friday Moody's
slashed Morgan Stanley putting the company on credit watch for a
possible downgrade. That came after grim predictions earlier in the week
on Citigroup and Merrill by Goldman. Lehman also lowered estimates on
Merrill Friday. With the Financials holding so much sway over the SP-500
it’s no wonder the markets are falling.
In addition to the
big brokers GE is having trouble selling its credit card operation
because of the negative implications in the consumer credit sector. GM
and Citi were cut to a sell earlier in the week because of negative
outlooks. In fact things are so bad credit derivatives are trading at
lower levels than the Q1 bottom when Bear Stearns went under.
The ABX index is
showing subprime debt to be trading for 5-cents on the dollar compared
to 50-cents 6-9 months ago. Higher rated dept is now trading for
50-cents rather than the 90-95 cents just six months ago. This is going
to cause some major write-downs for Q2. Six weeks ago everyone thought
the worst was behind us but traders are beginning to realize they were
duped. This is a nightmare for the Fed and the primary reason the FOMC
was not more hawkish in their statement on Wednesday.
Declining expectations and unknown valuations on financials are killing
this market---the Dow is on track for the worst June since 1930 and the
worst monthly loss since 2002. We have been in a bear market in the
financial sector and the homebuilders for months and it is finally
spilling over into the other sectors—even the once golden
multinationals.
A closer look at the drivers behind the financials are loans that are
almost impossible to get---M&A activity down by 35% over the last 6
months and buyouts down by 86% in the same period. On the business side
the lack of funding has complicated an environment where higher energy
prices are squeezing profits into losses. We saw last week that Dow
Chemical raised its prices by 25% for the second time in 30 days because
of rising oil prices. Those oil prices have risen another $10 just since
Tuesday. UPS and FedEx both warned this week that fuel prices and
weakening economy were cutting profits and there isn’t an airline in
existence that isn’t struggling. Even mighty Toyota warned that the
economic slowdown in the U.S. would force it to miss estimates.
Meanwhile consumer
sentiment is at 28-year lows and falling. Here is an incredible
statistic that makes you wonder why consumer sentiment isn’t even
lower--one third of all the home sales in the U.S. are foreclosures sold
by banks!
The problem is the
situation is likely to get worse due to the ongoing spiral of a falling
dollar and rising oil prices. There is a potential for a rate hike by
the ECB next Thursday and if they hike rates as they have already
telegraphed that would weaken the dollar even further contributing to
even higher oil prices. Traders appear to be targeting that $150 level
Morgan Stanley predicted by July 4th but we saw a $3 drop into Friday's
close from the $143 high. That $143 intraday peak may have been a climax
spike but I wouldn’t count on it—there are just too many factors driving
oil higher with the foremost one being a million barrel per day deficit
in worldwide production versus consumption.
This week there are
several key economic reports despite it being a holiday shortened
week—the markets will be closed for the fourth of July holiday on
Friday. The Chicago PMI on Monday is a key indicator of business
conditions and the ISM Index follows on Wednesday. The ISM is the
national version of the PMI report. The ISM has been in contraction
territory for the last four months but has been rising slightly the last
three. Anything under 50 is contraction territory and estimates are for
a 48.7 reading.
The Non-Farm payrolls report on Thursday is expected to show a loss of
50,000 jobs compared with the loss of 49,000 in May. Decent employment
has been what has held this economy together so far so any downside
surprise is likely to hit the markets hard.
So we’ve got a
deteriorating financial sector—the potential for an ISM decline, $140+
oil, earnings warnings, fear of Thursday’s nonfarm payroll report and
declining volume into the holiday—the question is...
HOW DO WE MAKE MONEY ON IT?
We’ve got two new
trades lined up this week and they both have some serious money-making
potential.
The first is on an
index that is absolutely ripe for a rebound—and even started Friday with
a positive close after an early big spike lower. The key on this one is
to ride it higher for the bounce and immediately short it the minute it
rolls over—a ‘one-two punch’ that is bound to make us a bundle!
Our next play is on
a small independent oil producer that just gave us the signal Friday to
jump in with both feet. This one shot up almost five dollars Friday on
DOUBLE its average daily volume—a huge technical BUY signal. The best
defense against rising gasoline prices is to profit from skyrocketing
oil prices—and that is exactly what we’re planning on this coming week!
We’ve got two great
plays lined up and a market ready to move—so let’s get going…
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