Broadmarket analysis is presented here courtesy of Cashflow Heaven.
WHICH WAY THIS MARKET IS HEADED
Although Thursday’s one-day crash was dramatic as
you can see from the charts it didn’t have the conviction of a
follow-thru on Friday—the market rebounded to close toward the highs of
the day which is a bullish indicator for next week.
The economics on Friday were bullish led by a
strong gain in the all-important Jobs Report. The economy added +166,000
jobs in October---the strongest month since May---double the
expectations for a gain of only +85,000.
The strong jobs gain indicates the Fed really had
to stretch to cut rates on Wednesday. They knew the big jobs gains were
coming but they also knew the markets would implode if they did not cut
rates as expected. They did cut one more time but corrected their
statement to a neutral bias lessening the chance of any future cuts. The
strong jobs likely provided a feeling of reassurance that this cut would
be the last needed—let’s hope it is.
Factory orders reported on Friday also rose unexpectedly in September
after a nasty 3.5% drop in August. Non-durable orders rose +2.1%
offsetting a -1.7% drop in durable goods orders. On balance the news was
good on Friday setting back the recession camp and adding fuel for an
end of the year rally.
After the bell on Friday news broke that Citigroup
CEO Charles Prince would be getting the boot—the latest CEO casualty in
the credit market meltdown. Board member Robert Rubin, the influential
chairman of the company's executive committee, will be named Citigroup
chairman, while Sir Win Bischoff, chairman of Citi Europe, will become
interim CEO. The emergency meeting is also expected to disclose some
additional write-downs on billions in securities continuing to drop in
value. It doesn’t look like the financials have ALL the bad news out of
the closet yet--but we are definitely headed in that direction.
Thursday’s big sell-off indicates funds have dumped
anything they did not want--- the support test on the major indexes was
successful and we there is a good chance we’ll move higher from here.
Signs are beginning to emerge that most of the bad
news is already priced into the market. The problems in banking are well
known--the tentacles of the subprime garbage continue to ooze out of
almost every portfolio---but the damage is manageable. Mortgages are
foreclosing in record numbers. The major investment banks have confessed
billions in write-downs. All those subprime mortgage problems have been
beaten to death—the markets have had their chance to implode but
haven’t—which means we have good chance to continue higher.
With the price of oil hitting all time records we should be seeing new
52-week highs on oil stocks but we’re not. Expenses are rising faster
than oil prices and production is slowing. The story is already priced
into the market and Chevron's 26% plunge in profits barely dented the
stock price with a nothing 56-cent dip..
Chevron reported the sharpest drop in profits in
five-years but crude is at an all time high—this divergence is not going
to last. Profits are going to rise even if crude adjusts down 10 or 20%.
Profits are going to rise and investors are going to pile back into
energy stocks on any dip in crude. That dip is likely to come after it
tags the $100 mark—a milestone that could come as early as this week.
The semiconductor index looks like it is trying to form a bottom at 450.
This is strong support and a positive earnings report by Cisco on
Wednesday could start a rebound. Almost every major tech including
Intel, Microsoft, Dell and Apple has been bullish on current PC demand.
The Nasdaq has been rising without the leadership of the SOX which is
usually considered critical—if the semis can kick in this week we’re
likely to see more upward momentum—especially in the big caps
represented by the QQQQ.
The bottom line is the bad news is priced in on the
financials. Oil, even if it corrects, will still attract new money.
Chips have fallen about as far as they are going to go without a massive
tech wreck. The Fed is behind the markets, jobs were very strong and the
Q3 GDP was almost 4%. Interest rates are cheap, China is growing at 11%
and every major multinational company reporting earnings has said how
strong the global economy is currently..
The only boogey-man still out there is housing and
that is likely to get worse—the key is everyone acknowledges it. There
was sharp increase in pre-foreclosures reported for October and that
number will continue to grow through March according to most sources.
Keep in mind this too is being priced in and at the slightest sign of a
bottom the bulls are likely to bid-up housing because the markets
discount six months ahead—and we’re likely to see a housing turn-around
by next summer.
The markets had a chance to plunge for real this
past week and didn’t—and that tells us we’ve got a decent chance for a
rally heading into the end of the year—the question is…
HOW DO WE MAKE MONEY ON IT?
We’ve got two trades lined up this week and they
are both bullish. The first is on a company in the oil sector that is
announcing earnings soon and they should be huge. The stock looks to
have bottomed this past week and is now heading higher. A continuation
to the upside in anticipation of earnings and the potential for a huge
jump afterward make this a very compelling trade.
Our next trade is on a major index that is leading
the markets higher. After Thursday’s breakdown we’ve got a great chance
to enter toward the low end of its range and ride this new wave higher
for some spectacular gains.
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