Market Update

On Thursday and Friday, the market managed to put together a bounce from some deeply oversold levels. The gains were to be expected as Put-Call and volatility readings exploded to the upside, signaling a possible turning point in both sentiment and trading.

However, this morning international markets and U.S. stock futures are in the red, with roughly 3 hours until the official New York open.

Today will be crucial in discerning where the market is headed this summer, as a failure at resistance will likely open further down side.

In my opinion, the bullish case would involve a retest of the lows, as “V”-shaped bottoms often portend that we are not out of the woods.

The final point is the nature of any rally to come, if there is one. I would continue to look for the defensive names (pharmaceuticals, healthcare, beverages, cosmetics, consumer staples, etc.) to gain some traction. In addition, it would not be unreasonable to see large caps finally outpace their smaller counterparts for a period of time. While the Dow Jones Industrial Average nearly eclipsed its all-time high this month, the Russell has been making new highs since November 2005—breaking its 2000 high by nearly 30%.



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Russell 2000 Index successfully tests the 50 day EMA (on the weekly chart), remaining well above the long-term uptrend line.

Market Movers

Put simply—there are none. This appears to be nothing but a “garden-variety” oversold bounce. While the Put-Call ratio, Volatility Indexes (VIX, VXO and VXN) and % of stocks below their 40 day EMA suggests some sort of low—I am not convinced.

If you harkens back to the bull of the 80’s and 90’s, it usually took some sort of outside event to spook shareholders into selling their lots. While we do have a fair amount of global tumult pervading the newswires, selling seems to still be of the profit-taking nature. In other words, I think we need some fear to creep back into the markets.

While corporate profits and the economy remain strong, investor appetite for stock seems to be waning. A deluge of new supply has come to the market in recent months (insider sales, IPO’s, convertibles, etc.) that will most likely outpace demand in my opinion, until a meaningful shakeout occurs.

Bonds also look to have made a bear market low and interest has been renewed in the defensive sector. This usually tends to be somewhat foreboding. There will clearly be a struggle by assets classes to gain investors hard earned money over the coming months.

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Time for a Bounce?

The global markets have taken it on the chin for the past few weeks, with the emerging markets getting hit the hardest. In the U.S., the Dow is the only major index to remain above the 200 day EMA.

The sectors hardest hit have been in the basic materials, mining and energy sectors, which should come as no surprise after the dynastic run they have enjoyed the past few years.

I would be watching the volume for clues as to whether this move is simply a correction, or something more.



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Weekly chart of Morgan Stanley Commodity Index still holding above trend-line support despite a sharp downturn from over-bought conditions

A Few Trinkets

Sometimes a little random (financial) knowledge can be interesting. Take for instance:

-The DaVinci Code premieres tomorrow. The Knights Templar (which figure fairly prominently in the story) are responsible for establishing the modern banking system.

-Never confuse brains for a bull market.

-Be on the lookout for further asset seizures/nationalization in countries that have significant natural resources with western companies responsible for extracting them. In the wake of Ecuador’s confiscation of oil assets this week, I detect a new trend emerging in Latin America and Africa (Nigeria mostly).

-The longer gasoline stays at record highs, the harder the push toward alternative energy.

-I firmly believe the U.S. dollar is greatly undervalued. The bearish argument built upon the “twin deficits” does not hold water. In a global economy where the U.S. economy thrives on Intellectual Property and relies upon Asia (mainly) for labor and manufacturing—import/export calculations will be inherently askew—showing a deficit where there is none to speak of. If a U.S. based Semiconductor Company exports a design for a chip to a fab in Taiwan and the finished product is sold in the U.S., it will show as a trade deficit. For all intents and purposes, it is not.

-Earlier this month the CFTC raised the margin requirements on Gold. Should this extend to the rest of the metals and energy, any sell-off in commodities would be greatly exacerbated.

-Based on yesterdays “hot” inflation number—specifically the service sector inflator—leads me to believe the Fed has more than one to go. This could prompt a short-covering rally in the dollar.



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Goldilocks and the Three Little Crows

Last week turned out to a difficult one for the market. On Thursday and Friday both the Dow and S&P 500 turned in their largest two day losses of the year, accounting for 250 points on the Dow and about 3% on the S&P 500. The NASDAQ is also down about 8% since the 8th of May and remains the weakest of the major Averages.

The pattern on the S&P 500 and NASDAQ looks eerily like a waterfall, which would most likely result in a “dead cat bounce” somewhere around these levels before resuming their downward spiral. The DJIA however, is still in ok shape technically, but will have a tough time moving higher if the other indexes give way.

For those whom are interested in candlesticks and patterns, the NASDAQ has validated the double top and also put in a bearish “three black crows” pattern, a moderate indicator of continued losses:



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Double-Top Follow-Up

Late Friday a CNBC commentator clarified what Chairman Bernanke meant in his recent congressional testimony—and once again, the market got it wrong.

Some key levels to watch that could potentially open up the NASDAQ to further downside and possibly a bearish trend:



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May Day

Asian and European markets are closed today in observance of the May Day Holiday; leaving the beginning of the week squarely on the U.S.’s shoulders.

The NASDAQ and S&P 500 are dangerously close to putting in a “double top,” with the dollar and higher commodities prices possibly acting as the catalyst to precipitate the move lower. While we have been in similar situations before (as for the most part the major indices have remained range-bound since November of last year), the action near the highs last week showed stronger signs of distribution than previously.

This could of course be a trap for shorts (as it has every other time), but $3 gasoline with the Energy Secretary basically predicting this for the next few years, a dramatically weakening dollar and an aging bull may finally catch up to traders. So far, the Dow Jones Industrial Average is the only index to remain above its previous highs, albeit not by much.



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