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Dallas, TX
May 13, 2009, 08:00 EST |
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Dr. Joe Duarte's Market I.Q. |
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Stock Rally Looks Increasingly Tired
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What's Hot Today: |
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U.S. stock futures turned lower in early trading. Overnight markets were mixed
but Europe had been up before turning lower. Oil prices were again testing the
$60 area.
Today's Economic Calendar:
- 8:30 a.m. Apr Import Prices: Expected: +0.7%. Previous: +0.5%.
- 8:30 a.m. Apr Retail Sales: Expected: 0%. Previous: -1.1%.
- 8:30 a.m. Apr Retail Sales, ex-autos: Expected: +0.2%. Previous: -0.9%.
- 10:00 a.m. Mar Business Inventories: Expected: -1.2%. Previous: -1.3%.
News For Thought
Foreclosure Data Shows Mixed Situation. The number of foreclosures rose, but the pace of proceedings slowed last month. According to the Washington Post: "Foreclosure filings leveled off last month after climbing steadily for more than a year, according to a report released today by RealtyTrac, but the continued high rate of such filings indicates that many borrowers remain at risk of losing their home." The Post added: "It was the highest monthly figure since the group began collecting data in January 2005. The number of homes receiving a foreclosure filing last month was up less than 1 percent from March, 2009, but reflected an increase of 32 percent compared with April 2008, according to the report."
Still, the data is murky, as activity has been slowed by foreclosure moratoriums, suggesting that when those expire, some kind of surge in foreclosure activity is possible.
White House To Set Financial Industry Pay Scale. According to The Wall Street Journal: "The Obama administration has begun serious talks about how it can change compensation practices across the financial-services industry, including at companies that did not receive federal bailout money, according to people familiar with the matter. The initiative, which is in its early stages, is part of an ambitious and likely controversial effort to broadly address the way financial companies pay employees and executives, including an attempt to more closely align pay with long-term performance."
The New York Times reported that the new rules, if and when they are put in place will aim to regulate how hedge funds and private equity firms pay their employees.
Medicare and Social Security In Danger Again. According to Investors.com: "The recession's toll on payroll tax revenue has sped the day of reckoning for long-untouchable entitlement programs, the annual report of the Social Security and Medicare Trustees confirmed Tuesday. Social Security, after more than three decades of providing extra cash to the rest of the government, is now expected to become a drain on the budget by 2016, one year earlier than in last year's report. Because of Social Security's legal status, negative cash flow won't immediately jeopardize benefits." Medicare's Hospital Insurance fund is on pace to be depleted by 2017.
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Stock Rally Looks Increasingly Tired
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Signs Of Weakness Appear In Stocks
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The stock market is starting to show signs of a moderate loss of momentum, which given the right set of circumstances, could easily accelerate. Aside from the fact that the market has come a long way in two months, we are heading into the seasonally blah period where the "sell in May and go away" tenet is weighing heavily on traders.
The Dow Jones Industrial Average (DJI) moved higher, but the Nasdaq Composite (COMPQ) and the S & P 500 (SPX, below) were lower and flat respectively. Also troubling was the market’s negative breadth on a day when the industrials recovered but the broader market did not. This, then, is what technicians call a negative divergence, and for the stock market, it’s a sign of weakness.
Chart Courtesy of StockCharts.com
Tired markets tend to become sluggish, with fewer and fewer stocks participating in every advance. Thus, it's not uncommon to see the Dow Jones Industrials continue to move higher as the rest of the market starts to slow. That's what happened on Tuesday, as the blue chips attracted money and recovered after being down for a fair amount of the day. The problem is that even though other indexes also recovered, and some stocks gained, the recent cohesiveness of the market, where most stocks were moving higher in tandem, was just not there.
There are two ways for this market to go from here, if it is to correct. One is sideways. That would be the best of worlds, as it would mean that a correction would be measured in time. The other possibility is for prices to fall, which would mean a correction measured in price. At this point, it's not certain which way things will go. One way to gauge things, though, is to watch for the action near key support levels for the S & P 500.
The S & P 500 has support at the 850-900 area. Any big moves below this range would likely lead to lower prices for some time, as investors panic.
Chart Courtesy of StockCharts.com
Another possibility is that we are seeing a sector rotation. The financial stocks (BKX) have been leading the way, while other sectors such as pharmaceuticals (DRG) have been lagging. On Tuesday, we saw money coming out of banks and headed into the large drug stocks.
Chart Courtesy of StockCharts.com
Still, that's not very comforting. And neither is the sudden loss of momentum in the restaurant stocks, such as Cheesecake Factory (Nasdaq: CAKE). The Restaurant stocks are an excellent way to measure the market's expectations for consumer spending. The big fade in CAKE and other restaurant shares is directly a result of rising oil and gasoline prices, which siphon disposable income away from leasure spending.
Finally, a look at the Philadelphia Housing Index (HGX) shows that expectations for a housing recovery are starting to fade as well.
Chart Courtesy of StockCharts.com
Conclusion
Cracks are starting to appear at the edges of the stock market's rally, suggesting that traders are having doubts about the potential for a sustainable economic recovery.
Aside from the fact that stocks have come a long way in a short period of time, the Obama administration is once again turning up the heat on Wall Street, and tugging at the edges of the free market economy, reportedly working on ways to change the way the financial services industry pays its employees, including hedge funds and private equity.
Health care reform is another albatross hanging over the market, as is the potential for a flood of foreclosures to surface once the moratorariums currently in place are removed.
In other words, uncertainty is back, just as the summer doldrums season approaches.
What it means is that it's time to be very careful. If you have profits, start to take them. If you have cash, hold on to it. And if you trade, keep positions small, follow your rules, and keep your stops a little tighter than you did just a few weeks ago.
Get Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for All Seasons. Also Available As Kindle Books.
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Market Moves - Stock Of The Day
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U.S. Oil Fund (NYSE: USO) Tests Key Resistance
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The U.S. Oil Fund (NYSE: USO) is likely to move today, as oil supply data is on
tap for release.
Chart Courtesy of StockCharts.com
If the general trend remains in place, the U.S. oil supply, as reported by the EIA will show some kind of decrease in current stockpiles. This is based on the API report released Tuesday afternoon. According to data compiled by Bloomberg, the EIA data follows the general trend of the API data 75% of the time.
If that's the way things develop, expect oil prices to make a move to close above $60, the current price resistance level. For those who trade the U.S. Oil Fund (USO), it would likely mean a close above the 34-35 area.
But, there's more to this than just trading. If oil and gasoline prices continue to rise, it would likely lead to a retrenchment in the economy. Part of the recent recovery in retail sales and the general state of the U.S. economy was helped by lower oil and gasoline prices.
If that stimulus is removed, then you're back to where you were a few months ago, with rising unemployment, the danger of foreclosure on the rise, and the threat of higher taxes and more government regulation on the rise.
The next question, though, is whether higher oil prices are sustainable if the economy turns lower once again.
But that's a longer term question to ponder. For now, it's more important to focus on the $60 area on crude.
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