Stock Market Review for Week of August
10, 2008
Broadmarket analysis is presented here courtesy of Cashflow Heaven.
WHICH WAY THIS MARKET IS HEADED
The SP 500
really performed
on Friday after
bouncing around
all week—but
even though it
put in a higher
high it is still
lagging because
the financials
were holding
back on Friday.
There is still
fear of future
write-downs and
potential bank
failures which
are valid
concerns but for
now the chart on
the SP-500 is
pointing higher.
The Nasdaq was the big winner last week jumping over resistance at 2350 on Wednesday and then falling back to use that level as support on Thursday before putting in a new relative high on Friday. This is a classic upward move and suggests the techs are attracting more buyers by the day. The SOX has rallied off its 52-week lows but still faces resistance at 370. A breakout there could add some real power to the Nasdaq rally. The strength in AAPL and RIMM is phenomenal and they are getting help from others in the tech space.
The markets on Friday pushed higher on three bullish influences--the Citi/UBS settlement on auction rate securities, the continued implosion in oil prices and the strengthening dollar.
UBS--Switzerland's largest bank--agreed to buy back $18.6 billion of auction rate debt securities whose value collapsed during the global credit crunch. This followed news on Thursday that Citi and Merrill would buy back almost $20 billion in auction rate debt. The market took these settlements as evidence the credit crunch is beginning to ease. With these major banks initiating the settlement process the smaller players will likely do the same giving the market hope that the credit crisis is slowly dissipating.
In addition to easing credit oil prices fell $4.87 to close at $115---well under the 122 support line from June. The chart is telling us we’ll see 110 soon and possibly the March lows at 98 before a meaningful bounce. This drop came despite a major pipeline bombing that took nearly one million barrels per day offline for up to five weeks and an escalation in the war between Russia and Georgia. Russia is the second largest oil producer and there are fears the conflict could reduce supplies from the region.
Meanwhile the U.N. group working on the Iran problem said it could be October before a new vote on sanctions could be brought to the U.N. Security Council. That effectively put the Iran problem on the back burner and out of the headlines. The result was a breakdown in support for oil over fears U.S. declines in miles driven will lessen the long-term demand for oil. The EIA said demand in July fell -2.3% over the same period in 2007. Americans are not driving and are altering their consumption habits--however, as we have seen countless times in the past the return of cheaper gasoline always increases demand to prior levels. The fall in oil prices is exactly what the Fed was hoping for since oil prices were a major contributor to rising inflation over the past six months. Falling oil prices will slow inflation, reduce costs for businesses and reenergize the global economy—and make any Fed rate increases less necessary.
Lastly the market was helped by the rise in the dollar---the US Dollar Index has exploded over the last two weeks to a six-month high making commodities including oil significantly cheaper in dollar terms. The rise in the dollar is especially sharp in relation to the Euro. The sharp rise in the dollar is a game changer for commodities and the balance of trade. A stronger dollar helps in many ways but mostly by lowering the cost of commodities and raw materials for U.S. firms and consumers.
All of this good news on one day created a huge short squeeze rally. All the major indexes broke out to new six-week highs and it would appear on the surface the bear market is over—but don’t believe it quite yet. All major market turning points occur on high volume but Friday's volume was barely over 8 billion shares. That said this rally looks tradable as any stock with decent fundamentals continues to climb—the key is to keep those stops under the trend to guard against the next surprise sell-off.
So, we’ve got all the major markets rising, the credit crisis easing, the dollar strengthening and inflation on the back burner—the question is…
HOW DO WE MAKE MONEY ON IT?
We’ve got two great looking plays lined up this week and it should be no surprise that they are both bullish.
The health care sector has been rocketing higher since the end of June providing one of the rare bright spots in a market pocked by cratered industries. After some careful research we’ve got two of the best plays in the sector lined up this week.
The first is on a medical device and drug maker that just grew bottom line profits 26% surprising analysts to the upside and driving the stock to new highs. The chart shows one of the cleanest uptrends around and we’ll be jumping on board first thing Monday morning!
Our next play is
on an ‘infection
prevention’
company that
just announced a
whopping 115%
earnings
increase with a
positive forward
outlook to
match! The net
result is a
stock climbing
much higher—but
last week’s
temporary
pullback is
giving us the
perfect
opportunity to
climb on board
for what looks
to be some
stellar upside
profits!
We’ve got two great bullish positions lined up on a market ready to rocket—so let’s get going…
For more information on the Pearly Gates trading newsletter subscription click on
www.cashflowheaven.com.
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